Last month, at a conference in Whistler, BC (one of the more beautiful places on Earth), I had the pleasure of attending a vibrant presentation by Tom Tibideaux of the University of Colorado Leeds School of Business. I found his message compelling enough to carry my notes here. I apologize for any inaccuracy in the transcription, but feel I have the gyst of his presentation captured here.
He was there to address the myth of the housing bubble. I say "myth" because Tom's clear message is that there is no housing bubble. He disagrees with numerous other economists, and provides lots of rational and evident explanation. House price futures are selling – people are hedging based on other economists vocal opinions. Economists’ forecasts are not always accurate. They are better historians than forecasters.
Greg Mankiw and David Weil wrote in 1989 that real house prices (after adjusting for inflation) will fall by 47% by 2007. In fact, they have done the opposite.
According to Schiller, real house prices have been flat for over 100 years, with two exceptions. First was after WWII, when there was a shortage. Second time was 2000 to now. We are having rapid increases.
A. Some Perspective - US Housing Markets 2000-05
A bubble is caused when there is unnatural growth. Key is liquidity and low transaction costs. Real estate is not liquid, and sales carry about 7% in transaction costs. This does not lend itself to a speculative mode.
Appreciation rates geographically range from 16% a year for 5 years running (Naples, Santa Barbara) to a low of 3-4% in Dallas and Houston. Two major contributing factors are land prices and labor. Texas has lots of available land (cheap), and labor is primarily Mexican (inexpensive). In California, land is very expensive (not much left), building is subject to more regulations (restrictions), and labor is more governed.
16 of the top 25 cities in terms of appreciation are in California. 20 of the bottom 25 cities are in Texas.
B. House Prices in Rocky Mountain Resorts
Since this was a meeting of the Rocky Mountain Resort Alliance, this was of interest. All of our resorts have had dramatic growth, though individual markets have shown fluctuation. Our Summit County resorts and towns are no exception.
C. What’s Driving House Prices?
In the past five years, there has been unprecedented demand on owner-occupied housing. There are half a dozen reasons, but no single one tells the whole story.
Construction costs have gone up a lot, and government regulations have contributed significantly to cost. And we have had a big push toward home ownership. We have basically eliminated the wealth barrier. People who could not qualify at 20% down can qualify with little or no down payment. That has driven demand up. And there is an increase in demand for second homes - people would rather put more of their wealth into an asset they can enjoy. Sub-prime interests rates also contribute.
Is there a housing shortage? Nationally, we get about 275,000 new households per quarter in terms of population. They need some place to live. To meet demand, builders have been adding housing units to the tune of about 400,000 per quarter. We also lose housing units for a variety of reasons, about 125,000 per quarter. Since 2003, however we started building more than needed. There is no shortage.
Construction costs have increased substantially since 2003. Prices of certain products are global, like concrete, lumber, etc. Even foreign countries put a drain on availability of supplies.
Each additional government regulation measure is associated with a statistically significant 4.5% increase in the prices of owner-occupied housing. This includes growth controls, minimum quality standards, large lot zoning (reduces density), and fiscal zoning (where property tax revenues exceed service costs).
There has been an unprecedented rate of increase in home ownership in the US. There are 117 million households in the, and the percentage ownership all households has increased from 65.4% to 68.3% 1996-2003. The prediction is that this is coming to an end, because it is unlikely that housing will go north of 70%. Difficulties on apartment ownership will ease.
Nominal house prices depend on affordability (area median income vs mortgage rates) and affordable housing loan programs (1st time homebuyer). The sub-prime loan market has grown at a rate of 25% annually. Home equity loans as a percentage of mortgage debt has also grown from 7.6% in 1994 to 11.78% in 2005.
Home owners have made a qualified decision to keep more money in their homes as opposed to other assets. Household equity as a percentage of total wealth has gone from 14.33% in 1999 to 20.49% in 2004. While owner-occupied housing has grown in the five years by over 10%, the amount of mortgage debt has grown by over 11%, and equity by over 10%.
Second home purchases in 2005 were 40% of all homes bought in the country. Investment homes were nearly 28% and vacation homes were over 12%.
A typical vacation home buyer is 52 years old, earns $82,000 a year, and shows a willingness to travel to these homes over 500 miles. 40% looked for mountain and beach homes. There are currently 36 million people aged 50-59 in the US and 45 million aged 40-49 (an increase of 25.6%).
[Next: is there a speculative bubble in the housing market?]
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