Friday, April 01, 2005

Towns Losing Balance In The Housing Bubble

This Sierra Sun article is a good example of the housing bubble resulting in poor capital allocation. In the Town of Truckee, home price increases are creating an apparent boom without a job base to support it.

Consider these quotes,: "Of all Truckee households overpaying for housing, 66% were homeowners, which suggests they stretched themselves financially for a chance to own a home. 'Because of the housing situation in Truckee, families are dispersing. Families are being forced out of a place that they have lived for a long time.'"

"While driving up the cost of living, it also drives down wages as service jobs in boutique shops, restaurants and recreation facilities spring up. Leisure and hospitality workers make $13,440 per year on average. Retail and trade workers earn $24,801. Service employees earn $26,834..more than 75 percent of Truckeeā€™s local employment base in 2000 was in retail, service and government employment sectors."

Traditional policy measures can't fix this problem. "There is only so much government can do. If we do everything in our power we might be able to solve 30 percent of the problem." Only with a bursting of the housing bubble will the balance be restored.


At 4:12 PM, Anonymous Anonymous said...

families commute longer, and pay more for gas. awesome.

At 6:42 PM, Anonymous Anonymous said...

Couldn't the government kill two birds with one stone by removing the tax breaks of owning and selling residential real estate?

By repealing the mortgage interest deduction and the capital gains exemption on the first 250K (or 500K for couples) on residential real estate sales, couldn't the government eliminate the budget deficit while deflating the housing bubble by making it a less tax-advantaged investment.

Why isn't this being seriously discussed as part of the tax-reform proposal?

At 6:52 PM, Blogger Ben Jones said...

(By repealing the mortgage interest deduction and the capital gains exemption)

Congress is too timid to try such a thing. Besides, it won' take that much to bust the bubble. One more half a percent interest rate hike should do it...Ben

At 7:12 PM, Anonymous Anonymous said...

Isn't it true to say that the median US home price in euros is about the same today as it was 4 years ago?

Doesn't this mean that there has actually been a huge dollar devaluation over the last 4 years rather than a housing bubble?

At 7:23 PM, Anonymous great caesar's ghost said...

Apologies in advance for the off topic post, but I thought I'd weigh in with a view on the housing bubble from the hinterlands i.e. Minneapolis. We're nowhere near San Diego, Las Vegas or Florida, but the bubble machine has definitely been plugged in. Median prices have risen 100% over the last 7 years to approx. 230K (OK I know all the Californians are salivating, but have you ever experienced -20 degrees before?). Median income is approx. 55K. And again to the West coasters this 4x income-house price ratio may seem like paradise, but in fiscally prudent Lutheran-land breaching the 3x1 conventional financing wisdom has taken a little more time.
Condos--excuse me "lofts"--are springing up everywhere. My neighborhood (Whittier), with the highest concentration of halfway houses in the city, has seen dozens of these new "lofts" and condo conversions. $350,000 for a "loft" whose view consists of the parking lot of the neighborhood drunkards liquor store of choice. $250,000 units perched on known drug dealing corners. All packaged by the marketers as part of the "urban living experience" and financed on 5 year balloons. And all day long I hear the radio ads pitch no-interest mortgages to the suckers while I revel in the fact that the rent on my vintage, architectural significant apartment (with view) has gone down three years running and that when I get tired of the "urban living experience", I just give 60 days.

At 7:50 PM, Blogger Ben Jones said...

great caesars ghost,
(I revel in the fact that the rent on my vintage, architectural significant apartment (with view) has gone down three years running)
I paid my rent today and I'd have to be a multi-miillionaire to live here otherwise.
Hey, excellent comment, thanks for taking the time..Ben

At 9:38 PM, Anonymous Anonymous said...

The best that the government can do is get out of the way. Many of the bubble markets are artificially supply constrained due to government in one way or another...

At 8:01 AM, Anonymous Anonymous said...

from an earlier post here, I followed that to a 5 year chart of home prices in a few florida counties. they were basically parabolic.
usually in a bubble prices fall BELOW where the bull market where did this bull start? 5 years ago, the early 90's, or the great depression/post-WW2 era?
think about this, "they" say RE has never declined on a national basis, of course they leave out the GD.

can we find the median prices of homes adjusted for inflation for 1920-1950?...I don't think I'd let myself believe RE could fall that far.

At 8:05 AM, Blogger Ben Jones said...

( in a few florida counties. they were basically parabolic. so where did this bull start?)

I would guess it was where the chart shot up.

At 12:47 PM, Anonymous Anonymous said...

-- Euro and Housing --

I think there is some merit in what you are saying about the Euro because there is a large contegent of foriegn buyers in the US. However, fundamental valuations in most major markets in the US are completely out of line. The fundamentals will always prevail.

I wanted to buy a duplex or 4-plex as an investment around where I live in the Seattle area. My main reason was so I could get a shedule E for my tax returns because I have paid off the mortgage of my modest home and need something to itemize. What I find around here are prices that are completely unrealistic.

You can't find a duplex with a cap rate greater than 4. Even those that are around a 4 are in run-down neighborhoods that will not sustain the rents in an economic downturn. The high-end neighborhood 4-plexes have cap rates of 2 or 3! People, a 3 cap rate is equivelant to a stock with a P/E of 33! By my calculations, prices are around 40% over-prices right now. And this calculation doesn't take into consideration a recession or depression where rents are falling - and rents have been falling (and vacancies rising) in the Seattle area for the last 5 years. They are only now starting to stabilize.

So all I have to say is buyer beware. Including (and expecially) foriegners! I remember the last real estate bubble in the US (circa late 80s) when the Japanese were buying prime NYC commercial properties. They sold out for less than 50 cents on the dollar five years later. Europeans will probably suffer the same consequences this time around.

Meanwhile, I'm holding cash equivalents (US dollars, Singapore dollars, Suisse francs and New Zealand dollars), and sitting this mania out. I'll be buying stockes when the S&P is yielding 6% and real estate when cap rates are at 10.

As Warren Buffet says, "Be fearful when others are daring and daring when others are fearful."

Right now is the time to be afraid...

At 4:31 PM, Blogger Ben Jones said...

(What I find around here are prices that are completely unrealistic.)

Thanks for the info on the Seattle area. Please update us from time to time..Ben


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