Throwing Money At Second Homes
This NY Times story explains how easily people in the US buy into the second home phenomenon. "Paul and Ann Hill, a pair of retired Atlantans, stopped in Ashland, Ore., in 2001. Their only plans involved dinner and a play at the long-running Oregon Shakespeare Festival. "We came into this town one day and bought a house the next."
"In the first three months of 2005, 91 homes were sold in Ashland. The median home price of those sales, $403,700, represented an increase of 32 percent over the first quarter of 2004."
"'People come there to see a play, and they fall in love with the town,' said Roy Wright, an appraiser. 'And they walk in one of those real-estate offices downtown and buy a house.'"
This guy has a new saying. "Like many Ashland newcomers, Davis hails from the San Francisco Bay Area. 'It's not if you came from California, but when you came from California,' he said."
Where ever the locale, the result is the same. "The influx of outsiders seeking second homes has had an explosive effect on housing prices. An example is Taos, where the value of residential real estate sold in 2004 was nearly twice the value of that sold three years earlier."
18 Comments:
20%-30% correction is for places that are not as hot.
I have seen 60%-70% correction in Hong Kong...
There could be correction combined with multiple year stagnation. Today's bubble is unprecedented. People talk about 20-30% corrections on average because that's the worst case scenario on average that the US has experienced in recent memory. E.g. early 90s in LA. But this bubble is so much bigger that we are entering new terriority. Look at Japan.... this massive RE bubble deflated very gradually. RE is going to be sticky on the downside as only the desperate will sell. Germany has been declining since 1975 when prices were much higher than the rest of Europe.
But if you dig around you will find some powerful examples. For example SE Mass (New Bedford) dropped 50% post 1989 if IIRC.
Where I live some mediocre condos have gone up 200% since 2001. In the last hot market here in DC the same units went up maybe 30% in 1986-1989. Price dropped slightly and then stagnated for this specific development.
T-Shirt - I went to Ashland, Oregon and all I got was this lousy investment!
Dan,
You should go buy a house in Ashland. It looks like a town where I would love to buy a foreclosed property - yours!
Dan,
A 5% correction would shake out the speculators and that would bring a fire sale.
When I first started blogging on this, I took an either/or approach. I quickly discovered that to challenge assumptions I needed to take a stand, one way or the other. The fact that so many are on the other side of the fence makes me pretty confident.
I had a big mortgage in central Texas. Since I sold, prices are still down and I sleep alot better at night. I don't worry about RE at all, anymore.
These people buying in Taos feel good because of appreciation, but they haven't sold yet. And when they get nervous, the exit may be crowded. With homes doubling in three years, I don't think a 20% correction is in the cards. Probably bigger. BTW: there is not a good job base in tourist towns.
people giving japans example forget one thing. Japan has over 20% savings rate.
What does it mean. People did not ahve to sell their homes to live or eat or go to the doctor.
In the US, almost every one who bought homes since 2001, has bought on ARM and many of them are coming due very soon. Some of them have refinanced/cashed out since then and they owe the bank even more!
There are no real savings overall in USA and these people who bought for the fear of missing out, they will wait for some time. Like the guy I talked to in OC. he gave up on his residence in 80s after one year and in the mean time it had reduced 20%. Atleast he had put something down and he did not want it let go and hence the wait.
Most of the current buyers dont have anything in their home other than their payments.
Homeowners, you have nothing to lose but your payments!
How about credit, integrity, and dignity?
Dan, I feel your pain.....after moving to LV last year for this job I've watched housing become increasingly absurd in valuation. I make close to 70 which I feel is a fairly decent wage but nonetheless I'm a renter and am fully prepared to rent if need be for the next 2-4 years to see this thing out. I'd much rather own as would anyone but to me I feel like if I buy I'm rewarding the greedy speculators and investors who have driven this market up in the first place. Bad timing I guess getting here in 2004 and being a first time buyer. So for now I'm just paying off credit card debt and other debt and watching closely what is going to happen, saving more. Today I found out some co-workers have formed a partnership for home investment....couldn't believe my ears...one of them I know has an ARM on his current home and lives well beyond his means...I just stood thier with nod and blink turned on. He says Vegas is too overpriced for thier partnership so now they are looking at other cities (Boise?). The plauge is spreading. What Californians did to Las Vegas, Las Vegans will try to do to other cities. Unbelievable. Reptilian greed remains, nothing changes through the course of history.
10 bucks says that "Dave" from the Bay Area isn't actually "from" the Bay Area at all. My bet is that he moved to the Bay Area from someplace else (probably the East Coast). Then, when too many people like Dave moved into the Bay Area and ruined all the things about the place that attracted Dave in the first place, he decided to move north to Oregon to try to find another "Bay Area". And the pattern repeats itself, doesn't it?
I think we can all safely agree that bubbles in housing or other necessaries are a bad thing. They force ordinary people to spend more on fixed expenses while enriching those whose main qualifications for the windfalls they received were being born earlier -- and they expose people to towering risks of overextension. Speculation in stocks is one thing; people don't need them to survive. Housing speculation is a classic case of haves oppressing the have-nots -- and I speak as a granite-ribbed economic conservative.
WHY IN THE NAME OF ALL THAT'S HOLY does the government subsidize housing speculation, by allowing the mortgage interest deduction for second homes?
Home ownership is now at 70%. I guess it is all about vote. Any change in the deduction rule will be deemed as a step against home owners and will be fought accordingly.
Maybe we can quietly change that by disallowing deduction of ALL mortgage interest under AMT? Or we can create a different phaseout schedule for mortgage interest deduction?
Thomas,
Great points, thanks.
Ben or anyone else, I have a theory/hypothesis that the casino companies(MGM, HET, LVS, STN, WYNN, MGM) and Las Vegas in general have benifited greatly from the refi/home equity loan bonanza that has occured in the past 2-3 years. If you look at a 5-10 year chart for any of these tickers you can see that thier value has risen quite noticably from about 2002-03 onward...about the same time as heavy refi's were going on. So someone refi's or gets a home loan and what the hell, I'm going to vegas a blowing $5000. Chump change for the homeowner. Well lately all these stocks are going in the tank or just treading water. Possibly a sign or maybe I'm way off base. Is this perhaps another result of the cheap credit bonanza that we've been experiencing?
That's why a flat tax or eliminating the income tax by imposing VAT would be a good idea.
I deduct half me rent for business purposes so don't really lose by renting. In effect I am able to deduct (half) the condo fee and utilities whereas I would not be able to do so if I owned the place.
The effect of tax savings are not that great. Well, I suppose they are getting more significant as people take on huge amounts of debt. Also people are ignorant. I swear that many people think that they get a tax CREDIT and not a deduction.
LV_realprop, casinos are very capital intensive. I guess the stock prices are responding to rate hikes?
LV_realprop,
I think you may be on to something.
Over the past 5 years or so I've seen the prices in Vegas jacked up quite a bit. You used to be able to get a WEEKEND hotel room in a mid-level strip hotel around $60-80. Now you're lucky if you can get one for under $150. But at the same time, I see more and more people going to Vegas. I keep wondering where they get this money... You might have answered my question.
Dan,
The price change in housing may not be nearly as harmful as the slowdown in volume. I had a house in MI that took 4 years to sell. The market was so bad that a lot of showings were to thieves who were casing houses to rob. Some of them would split and leave one person with the realtor while the other one stole, or they would break in a few weeks later. Some of them got caught most didn't.
That wasn't a bad market price wise, merely a slow one. I don't think people really understand what a housing market that produced 20-30% losses across the board would look like. I don't think I understand it myself.
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