Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
The End of the Housing Bubble
The United States real estate bubble is dead at last. In the first quarter of 2012 the quarterly inflation-adjusted Case-Shiller index dipped to 113, a level it had not held since 1998 at the very beginning of the housing bubble. What this means is that nearly the entirety of the bubble gains in housing value have now been squeezed out of housing prices. This is cause for some modest celebration. The market for housing is no longer dangerously and dramatically out of balance. In the second quarter prices rose to a real level of 120.
For those thinking of buying a house, the fact that nearly all the froth is out of the housing bubble should be some tentative reassurance. Although prices in some cities will rise, and prices in others will fall (local conditions are still very important!) the broad housing market is no longer substantially out of alignment.
But this should not be a moment to renew speculative bubble behaviors. It is at least somewhat worrisome that the index then bounced back to 120 in the second quarter of 2012. Though history suggests that house prices do experience substantial boom to bust swings, real (that is inflation adjusted) housing prices have remained relatively constant over the last 120 years in the United States. Any investment decision based on a naive belief that housing will somehow rise much faster than inflation over an extended period is almost certainly a bad decision.
Whether it makes sense to invest in housing depends upon the specifics of the local market, and upon the degree to which a particular property meets the needs and goals of the investor. Some markets fell well below their historic long term value in the last several years. So long as the local economy has good long-term prospects, well selected property in these markets is likely to be an excellent investment. Other markets have seen much more modest corrections, and particular care should be taken in such markets not to buy property for more than its historic inflation-adjusted value (for more see my earlier post on calculating the value of a house based on historical sales history adjusted for inflation http://www.idealtaxes.com/post3198.shtml).
One final caveat is in order. Housing prices are currently being supported by historically low long-term interest rates. The ability to purchase a house with a 30 year mortgage at 3.5 percent interest (as I did in March 2012) must be acting as an incentive for investment. When long term rates eventually rise, this may spur some renewed weakness in the housing market. In addition, substantial declines in real median household income over the last decade may pressage weak housing demand and lower prices.
Last 100 Years
Real Estate Taxation
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