Monday, August 23, 2010

Has the Bursting of the Real Estate Bubble Taken Homes and Housing Out of the Wealth Equation? Zillow.com and Globrix.com Show Some Astoundingly High Prices Yet

We greatly enjoy looking at homes and housing and world real estate prices at superb property sites such as Zillow.com in the USA or Globrix.com in the UK.

Anyone who scans housing prices in the USA or the UK from coast to coast at those sites should quickly realize -- even after the housing bubble burst, that in some locations many home and housing prices are still totally out of whack when compared with what people actually earn and when compared with the price of a home 20 years ago. Luxury homes in the USA and homes generally in the UK carry outrageous price tags.

We say this is in spite of David Streitfeld's August 22, 2010 NY Times article that
Housing Fades as a Means to Build Wealth, Analysts Say
where he suggests that the housing gold rush is gone for good.

As Streitfeld writes:
"Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up."
We have great sympathy for those affected by the credit crisis, but none of that housing wealth was "real" wealth to begin with. It was simply "paper money" resulting from a type of "Ponzi" scheme created by credit derivatives and similar real estate investing that turned homes and housing into hyped and purported "investments" rather than places to live, thus driving up home prices to absurd levels from one buyer to the next.

A home in the USA that sold for $100,000 in 1990 was going for nearly three times that price at the tip of the housing bubble, far outstripping gains in personal income of the middle class.

What economic VALUE had been created in such properties in that 20-year interim to justify such high prices of homes?

In fact, nothing of value was created, and that is the problem.

Just because someone agrees to pay $300,000 for a home worth only $100,000 does not add $200,000 in actual long-term value to that home. All it means is that the buyer has agreed to an inflated home price and has taken out a mortgage for that amount. That house may be of that value to the buyer, as long as he is able to keep up his mortgage payments, but the price may have nothing to do with an objective real estate appraisal of the value of the home and property.

Home prices thus rose because people were permitted to take out inflated mortgages for overpriced homes that they really could not afford, relying on the hope that the value of homes would rise even more and they could soon sell them for a profit. When the bottom fell out of the market, they and their mortgage bankers and their affiliates were left holding the empty bag, which government bailouts have been refilling. Someone else pocketed the money and laughed all the way to the bank, Bush tax cuts in hand. The average, gullible citizens are thus duped out of their money.

The so called "wealth" increase in home values was a fata morgana, a mirage, and many homeowners still value their homes from that faulty perspective, so that the offered prices of many homes, especially those catering to the high income brackets, are still today often an absurd multiple of what the home originally cost not so long ago.

In many cases, prices are still much higher than the actual value of the properties. We recently saw a property in upstate New York being offered for $2 million, which Zillow.com however valued at less than $300,000. In the UK on Globrix.com we saw a property on the south coast being offered for about £3 million although most surrounding luxury homes had recently been sold for only about £500,000.

Accordingly, we do not necessarily agree with Streitfeld's analysis that housing bubbles are not a danger in the future. There are always people investing money in real estate and that always drives up home prices. Just imagine if we had a law that individual home purchases for investment purposes were forbidden and that you could only own the place where YOU live. Then home prices would be where they should be in terms of land value, construction costs and buyer income levels. Right now, every home purchased finances not only the house and lot purchased, but also a multitude of investors.

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