Alright — ready for a little heresy? It’s hard to believe that houses on the Northeast Avalon are worth what people are paying for them. It’s hard to believe that the market is truly healthy, or that it will remain that way.
In fact, it’s hard to believe that no one is pointing out the bubble could burst.
First, a caveat: I’m not an expert on realty. But neither, as many so-called experts are, am I in a conflict of interest because my income depends on sustaining the idea that everything’s booming and will necessarily be worth more in the future than it is now.
Now, there are people who do well by high housing prices: realtors, bankers and municipal councils, to name a few, because for all of those cases, their income or tax revenue is proportionally based on housing prices and naturally increases in lockstep with those higher prices.
But outside of those areas, increased house prices merely drag money out of the economy. Instead of buying wine or lettuce in winter or any of those other “luxuries,” the money instead becomes a sunk cost, going into debt servicing and increased tax bills. (Perhaps you could argue that increases in prices also help those who might have bought at lower prices when they go to sell — that might be true, as long as they are not purchasing again in a market that’s charging more than things are worth.)
But look at the hard numbers in our economy: our population is shrinking, or, at best, barely above stagnant, it’s aging dramatically, and while house prices have easily doubled in the last six years or so, no other facet of our economy has performed anywhere near that well. Yet, in number alone, houses are going up faster than the most-optimistic individual population numbers are.
In particular, salaries have hardly kept pace with either the rate of local inflation or the housing market — leaving prices for homes to reside in the only place they possibly can: in the netherworld of dramatically increased household debt.
You could look at it this way: unable to squeeze blood from today’s stunted turnip, increased housing prices are taking money from the only possible place that they can. They’re harvesting all discretionary income not only from the now, but from the future as well.
Now, we are doing it to ourselves: we are, after all, the ones who are putting the money down, who are competing with other buyers to lever the last little bit of cash flexibility we have to try and outbid everyone else — all the while being told that it’s the right thing to do, that the market’s only getting stronger, by exactly those people who stand to make the most from our eager decisions.
Remember the story about the emperor having no clothes?
Maybe the emperor has no real equity — and the only way the shell game works is if everybody continues to believe that it does.
But here’s the problem: even the future is not an unlimited cash-mine. Car dealers, uncomfortable with the take-up on five-year car loans, are now moving to seven-year terms.
But if you look at that pragmatically, they are mortgaging their own future, too, as buyers who might have rolled into new cars five years from now wait to pay off their old cars instead.
I think a housing reckoning is coming to this marketplace, one that will either be precipitated by the tailing-off of people with the necessary available credit, or by something as simple as a very minor escalation in interest rates. Talk to realty lawyers now, and they’ll tell you they’re downright amazed by how close to the line people set their budgets — budgets that buy houses, but only if there are no surprises, no emergencies, and most of all, no increase in rates for a very long time.
Years ago, talking about the stock market, I remember writing that there was something implicitly wrong with assuming that everything would be worth more next year.
Things do not necessarily increase in value, and if they increase in price, that’s not the same thing. The markets found that to be true. I fear home owners will as well.
Russell Wangersky is the editorial page
editor of The Telegram. He can be reached by email at email@example.com.