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great housing article- From the Economist

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Sassyz75
Turning a new page

Member since 5/05

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Name:
Dina

great housing article- From the Economist

I love the Economist- it's really a great magazine-

Here's the cover story from their most recent issue on the housing market. It's interesting, in that it looks at the world economy- i.e. the macroeconomic picture:

After the fall

Jun 16th 2005
From The Economist print edition


Soaring house prices have given a huge boost to the world economy. What happens when they drop?


PERHAPS the best evidence that America's house prices have reached dangerous levels is the fact that house-buying mania has been plastered on the front of virtually every American newspaper and magazine over the past month. Such bubble-talk hardly comes as a surprise to our readers. We have been warning for some time that the price of housing was rising at an alarming rate all around the globe, including in America. Now that others have noticed as well, the day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years.

This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history (see article). The bigger the boom, the bigger the eventual bust.

Throughout history, financial bubbles—whether in houses, equities or tulip bulbs—have continued to inflate for longer than rational folk believed possible. In many countries around the globe, house prices are already at record levels in relation to rents and incomes. But, as demonstrated by dotcom shares at the end of the 1990s, some prices could yet rise even higher. It is impossible to predict when prices will turn. Yet turn they will. Prices are already sliding in Australia and Britain. America's housing market may be a year or so behind.


Many people protest that house prices are less vulnerable to a meltdown. Houses, they argue, are not paper wealth like shares; you can live in them. Houses cannot be sold as quickly as shares, making a price crash less likely. It is true that house prices do not plummet like a brick. They tend to drift downwards, more like a brick with a parachute attached. But when they land, it still hurts. And there is a troubling similarity between the house-price boom and the dotcom bubble: investors have been buying houses even though rents will not cover their interest payments, purely in the expectation of large capital gains—just as investors bought shares in profitless firms in the late 1990s, simply because prices were rising.

Homes as cash machines

One other big difference between houses and shares is more cause for concern than comfort: people are much more likely to borrow to buy a house than to buy shares. In most countries, the recent surge in house prices has gone hand-in-hand with a much larger jump in household debt than in previous booms. Not only are new buyers taking out bigger mortgages, but existing owners have increased their mortgages to turn capital gains into cash which they can spend. As a result of such borrowing, housing booms tend to be more dangerous than stockmarket bubbles, and are often followed by periods of prolonged economic weakness. A study by the IMF found that output losses after house-price busts in rich countries have, on average, been twice as large as those after stockmarket crashes, and usually result in a recession.

The economic damage this time could be worse than in the past because house prices are more likely to fall in nominal, not just real terms. Not only do houses in many countries look more overvalued than at previous peaks, but with inflation so low, prices would have to stay flat for at least a decade to bring real prices back to long-run average values. Most important of all, in many countries this house-price boom has been driven far more by investors than in the past, and if prices start to dip, they are more likely to sell than owner-occupiers. In America this could mean the first fall in average house prices since the Great Depression. Owners who have been using their home like an ATM to extract cash, or who were relying on rising house prices to provide them with a comfortable pension, will suddenly realise that they need to start saving the old-fashioned way—by spending less of their income.

The Fed frets

The lesson from recent experience in Australia, Britain and the Netherlands is that, contrary to conventional wisdom, a big rise in interest rates is not necessary to make house prices falter. This is bad news for America. Even if prices there initially just flatten rather than fall, this will hurt consumer spending as the impulse to borrow against capital gains disappears. It is by encouraging such borrowing that rising house prices have given a bigger boost to America's economy than elsewhere. Two-fifths of all American jobs created since 2001 have been in housing-related sectors such as construction, real-estate lending and broking. If house prices actually fall, this boost will turn into a substantial drag.

No wonder that the Federal Reserve is starting, belatedly, to fret about house prices. By holding interest rates low for so long after equities crashed, the Fed helped to inflate house prices. This prevented a deep recession, but it may have merely delayed the needed economic adjustments. Ideally, the Fed should have tried to cool the housing boom by raising interest rates sooner and by giving clear verbal warnings to buyers, as Britain's and Australia's central banks have done. Even now some stern words from Alan Greenspan, the Fed's chairman, could restrain more house-price inflation.

Of course, by the time American prices begin to fall, probably sometime next year, they will not be Mr Greenspan's headache. He will have retired and someone else will be in his job. If weaker house prices push the economy towards recession, the awkward truth is that America's policymakers will have much less room to manoeuvre than they did after the stockmarket bubble burst. Short-term interest rates of only 3% leave less scope for cuts. In 2000, America had a budget surplus. Today it has a large deficit, ruling out big tax cuts.

The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronised, and thus the effects of it will be shared widely. The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion

Posted 6/23/05 9:47 AM
 
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danielleandscott
My new 71 Super Beetle

Member since 5/05

13476 total posts

Name:
Scott

Re: great housing article- From the Economist

WOW great article. So I guess by next year we will notice a difference with the prices of houses

Scott

Posted 6/23/05 10:36 AM
 

CookiePuss
Cake from Outer Space!

Member since 5/05

14021 total posts

Name:

Re: great housing article- From the Economist

Great article.

Posted 6/23/05 10:53 AM
 

Sassyz75
Turning a new page

Member since 5/05

9731 total posts

Name:
Dina

Re: great housing article- From the Economist

It has taken me 30 years on this Earth to understand economics.
I wanted nothing to do with it when I was in undergraduate school, but now it facinates me.
I think we're going to hold off buying for a while.
We are still going to move to LI but we're going to rent.

Posted 6/23/05 11:01 AM
 

CookiePuss
Cake from Outer Space!

Member since 5/05

14021 total posts

Name:

Re: great housing article- From the Economist

Posted by Sassyz75

It has taken me 30 years on this Earth to understand economics.
I wanted nothing to do with it when I was in undergraduate school, but now it facinates me.
I think we're going to hold off buying for a while.
We are still going to move to LI but we're going to rent.



Tee Hee...I feel the same way. As an investment professional, I'm facisnated by ecomonics and cycles and the way indicators, leading and lagging, work together. I had read something very similar to this article but it focused on Britian. A couple of things that I would be interested in finding out further would be how Britian and Austrailia property taxes compare to those in America and what their mortgages look like compared to those being used in abundance here in the US. I really believe that the US housing industry is going to burst and is going to cause a lot of bankrupcies and foreclosures. Here in the US, consumers tend to over-extend themselves and create a lot of debt.

Posted 6/23/05 11:14 AM
 

Sassyz75
Turning a new page

Member since 5/05

9731 total posts

Name:
Dina

Re: great housing article- From the Economist

Posted by shamrock12472

Posted by Sassyz75

It has taken me 30 years on this Earth to understand economics.
I wanted nothing to do with it when I was in undergraduate school, but now it facinates me.
I think we're going to hold off buying for a while.
We are still going to move to LI but we're going to rent.



Tee Hee...I feel the same way. As an investment professional, I'm facisnated by ecomonics and cycles and the way indicators, leading and lagging, work together. I had read something very similar to this article but it focused on Britian. A couple of things that I would be interested in finding out further would be how Britian and Austrailia property taxes compare to those in America and what their mortgages look like compared to those being used in abundance here in the US. I really believe that the US housing industry is going to burst and is going to cause a lot of bankrupcies and foreclosures. Here in the US, consumers tend to over-extend themselves and create a lot of debt.



Well that's the problem.. I'm nervous because our economy has been fueled by home equity loans... Americans don't save anything- they spend, spend and spend some more...
The "have it now" mentality has really caused this- and the believe that housing is 100% safe...
It's scary...
There is more in depth discussion on the situation in The Economist- but it's too long to post- you should pick it up if you're interested, it's also macro focused.

Posted 6/23/05 11:23 AM
 

danielleandscott
My new 71 Super Beetle

Member since 5/05

13476 total posts

Name:
Scott

Re: great housing article- From the Economist

Is there a website, or where do they sell this magazine? Can you fm me the details
Thanks,
Scott

Posted 6/23/05 11:52 AM
 

CookiePuss
Cake from Outer Space!

Member since 5/05

14021 total posts

Name:

Re: great housing article- From the Economist

I don't know where you can get "The Economist" but I use www.actioneconomics.com for updated reports and such. You can get a free trial.

Posted 6/23/05 11:55 AM
 

MrsR
My love.

Member since 5/05

6247 total posts

Name:
Jennifer

Re: great housing article- From the Economist

Good article - but I just want to warn everyone not to get all their info and base all their decisions on information from one place.

Posted 6/23/05 12:00 PM
 

Sassyz75
Turning a new page

Member since 5/05

9731 total posts

Name:
Dina

Re: great housing article- From the Economist

They sell the magazine at Barnes & Nobels....

I read a whole bunch of articles about this market- some are doom and gloom, some or not- but 99.9% of them think that the market is going to come down- now it's just by how much.

Posted 6/23/05 12:02 PM
 

Sassyz75
Turning a new page

Member since 5/05

9731 total posts

Name:
Dina

Re: great housing article- From the Economist

Here's the other article:
Economist

Posted 6/23/05 12:15 PM
 

danielleandscott
My new 71 Super Beetle

Member since 5/05

13476 total posts

Name:
Scott

Re: great housing article- From the Economist

Thanks for the website

Posted 6/23/05 8:09 PM
 

Sassyz75
Turning a new page

Member since 5/05

9731 total posts

Name:
Dina

Re: great housing article- From the Economist

Posted by danielleandscott

Thanks for the website



sure :)

Posted 6/23/05 10:02 PM
 

skew
LIF Adult

Member since 5/05

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Re: great housing article- From the Economist

in my humble opinion, i think prices will drop in some areas but NOT on LI. basic principle of economics, SUPPLY and DEMAND. the island is overpopulated as it is and i don't think that will drastically change ANYTIME soon.

Posted 6/24/05 9:33 AM
 

CookiePuss
Cake from Outer Space!

Member since 5/05

14021 total posts

Name:

Re: great housing article- From the Economist

Posted by skew

in my humble opinion, I think prices will drop in some areas but NOT on LI. basic principle of economics, SUPPLY and DEMAND. the island is overpopulated as it is and i don't think that will drastically change ANYTIME soon.



Actually, if you look at housing statistics, the demand is drying up. And migration off of Long Island and the metro area has increased. Aside from supply and demand, basic economics demands some type of support levels for the housing prices and currently, those are weak. The medium income within the area can't support the housing prices, property taxes and standards of living. For example, if you take a 400k house put a $1000.00 down with $6000.00 of property tax, you have an approximate mortgage of $2500 per month, $500 per month for property tax at 1/3 AIG means that the gross income would have to be about 200K. We don't have a job market that supports those income levels. These numbers are based on a fixed mortgage but mortgages are now overwhelming variable and interest only.

Granted, these are hypothetical numbers and there are quite a few people in the area that can support those numbers, but on whole, the Metro area's economy doesn't have the support level to do so.

Posted 6/24/05 9:53 AM
 

danielleandscott
My new 71 Super Beetle

Member since 5/05

13476 total posts

Name:
Scott

Re: great housing article- From the Economist

Posted by skew

in my humble opinion, i think prices will drop in some areas but NOT on LI. basic principle of economics, SUPPLY and DEMAND. the island is overpopulated as it is and i don't think that will drastically change ANYTIME soon.



I think Prices may drop on LI but not drastically. Yes I agree that the house market is drying up a bit now. I look at all the real estate websites and I see plenty of good houses sitting on the market longer now then they have been in the past few months. I also see the prices being reduced on these houses, but not drastically...only by $5,000 to $15,000 at the most.

I don't believe we will ever see houses priced like they were 5 years ago again, and if we do see those prices, it wont be for a very long time.

Scott

Posted 6/24/05 10:06 AM
 

MsG
Should be working

Member since 5/05

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Name:
G

Re: great housing article- From the Economist

I kind of think of housing like I do food and transportation- not an investment, but a necessity. The investment part is there, but to me it is an added bonus, not something I'm counting on.

For example we will be buying a home and paying about $400 more per month than we would if we were renting it (that includes taxes). After the tax break and considering we can do what we want to it and not have to rely on a landlord or ask permission, it's worth it to me.

My DH sees the long-term picture. I guess I do too, but I don't feel comfortable being speculative about real estate right now. I looked at it like we can rent for a lot of money (rents are pretty high too) or we can buy and have a little peace of mind that the price won't go up over the years.

Posted 6/24/05 10:53 AM
 

Sassyz75
Turning a new page

Member since 5/05

9731 total posts

Name:
Dina

Re: great housing article- From the Economist

Posted by MsG

I kind of think of housing like I do food and transportation- not an investment, but a necessity. The investment part is there, but to me it is an added bonus, not something I'm counting on.

For example we will be buying a home and paying about $400 more per month than we would if we were renting it (that includes taxes). After the tax break and considering we can do what we want to it and not have to rely on a landlord or ask permission, it's worth it to me.

My DH sees the long-term picture. I guess I do too, but I don't feel comfortable being speculative about real estate right now. I looked at it like we can rent for a lot of money (rents are pretty high too) or we can buy and have a little peace of mind that the price won't go up over the years.



I think the point of the article though is that most people DON'T think like you.. if they did, we probably wouldn't be thinking about this...

YOU and DH think the right- non speculative... however- there are places- like in Miami and even where I live in JC where apartments are sold before they are built....

Also- the danger is in the adjustable and no-interest mortgages....

Posted 6/24/05 11:13 AM
 

Bxgell2
Perfection

Member since 5/05

16438 total posts

Name:
Beth

Re: great housing article- From the Economist

I just listened to a program on NPR about this... I think the real issue isn't necessarily that the housing prices are so high, but more so that these mortgage and equity companies are appraising the homes for more than they are worth so that people can take loans against the house to pay for closing costs, renovations, bills, etc. It's not such a problem now, but if the real estate market crashes, these people who have taken loans against a house that appraised for much more than they are worth will find it enormously difficult to pay off the debt when (and if) they plan to sell. It won't be such a problem if you can hold onto your house and ride the market changes, but for those who lose a job, or need to sell right away because they are moving, or are older and can't afford maintenance of a house, it will really hurt.

Posted 6/24/05 12:56 PM
 
 

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