The end of the real estate boom
December 25, 2005
The US economic expansion probably
would have ended somewhere in the mid-1990s were it not for the
influx of foreign capital due to numerous currency crises during
that decade. The general stock market had already run out of steam
by 1999 and by 2001 it looked like the market might collapse, dragging
the US economy with it. Aggressive interest rates reductions prevented
a collapse by fueling a real estate boom that kept both the stock
market and the economy on life support. But now it seems that even
the real estate market can take no more. Earlier this month we learned
that the inventory of homes for sale had reached the highest level
in 19 years, and housing affordability was at a 14-year low. This
week there is yet another article in the Wall Street Journal about
housing affordability.
According to a study prepared by Moody’s Economy.com
for the Wall Street Journal, housing affordability fell almost 9%
in the third quarter from a year ago. In some markets, affordability
declined by more than 20%. On a percentage basis you have to go
back 25 years to find a decline in affordability as significant
as this.
Earlier I read that there is not one county in the
entire United States where a person working full time, earning minimum
wages, can afford to rent a one-bedroom apartment. But it is not
only lower income families that are having accommodation problems:
even middle to upper income families find it difficult to move up.
In some areas of the country, such as New York, Los Angeles, San
Diego, San Francisco and Miami, affordability has declined to levels
not seen since the ‘80s.
According to the Mortgage Bankers Association, mortgage
applications are at their lowest level in almost a year. Also, home
ownership has started declining from the record 69.4% reached in
the second quarter of 2004 and now stands at 68.7%. It may not be
a large decline, yet, but it certainly signals the effect that rising
house prices and rising mortgage rates are having on homebuyers.
I do not believe this is a trivial matter, which is
why I have dedicated so much time to writing about the real estate
market. As the real estate market goes, so goes the economy and
the stock market. The only thing that could keep the US on life
support a little longer is another round of interest rate reductions,
but this time it could hurt the dollar, and that would mean higher
gasoline prices again, so it’s a double-edged sword.
This, however, is the season to be merry, happy and
thankful. I am thankful that I do not have Ben Bernanke’s
job.
Happy Holidays,
Paul van Eeden
P.S. I will be taking some time off and so there will
not be another commentary until January 6th.
P.P.S. I may in future stop publishing these commentaries
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Paul van Eeden works primarily to find investments
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to his weekly investment publication. For more information please
visit his website (www.paulvaneeden.com) or contact his publisher
at (800) 528-0559 or (602) 252-4477.
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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