Can today's housing market be considered a financial bubble?
Tuesday, April 17, 2007
Wednesday, January 25, 2006
Housing Prices, Is There A Bubble?
Historical Price Bubbles share two common characteristics.
1) A precipitous, unprecedented, breathtaking rise in the price levels of the bubble commodity.
2) An equally precipitous, unprecedented and breathtaking decline in the price levels of the bubble commodity.
In order to consider the rise in home prices over the last five years as having formed a "bubble", home prices must meet the two common characterisitcs found in every past historical price bubble. Do they?
Over the last five years home prices in many parts of the country have risen substantially. In many places home prices have risen by well over 50%, and in some areas home prices have doubled. In a few places the rise has been even greater. Does this constitute a precipitous, unprecedented and breathtaking rise comparable to past financial bubbles? The last financial bubble was the tech-stock bubble of the late 1990's. Listed below are some of the stocks and how far they rose in price.
AMAZON - rose from $5 a share to $113. A rise of 22x.
CNET NETWORKS - rose from $4 a share to $80 a share. A rise of 20x.
CHECKFREE - rose from $6 to $125. A rise of 20x.
REALNETWORKS - rose from $4 to $96. A rise of 24x.
VERISIGN - rose from $5 to $258. A rise of 51x.
YAHOO - rose from $4 to $125. A rise of 31x.
Have home prices anywhere in the country seen anything like this type of appreciation? Have homes risen anywhere by 20x their previous price? In most areas homes have not even risen by 2x, let alone anything close to 20x appreciation. My own home has risen from the low $200,000's to the upper $300,000's. A tremendous rise, but still a far cry from 20x appreciaiton, which would see my home price rise to $4,000,000. Now your getting a sense of just how crazy all real financial bubbles are, including the recent tech-stock bubble.Clearly, home prices have not risen to anything approaching past historical bubble levels.
Here's what happened to the price levels of the tech-stocks listed above.
AMAZON - declined from $113 to $6 a share.
CNETNETWORKS - declined from $80 to below $1 a share.
CHECKFREE - declined from $125 to $7.
REALNETWORKS - declined from $96 to $3.
VERISIGN - declined from $258 to $4.
YAHOO - declined from $125 to $4.
In most cases the price levels declined to what they were before the bubble and in some cases even below that. Many of the tech-stocks that saw such spectacular price rises have simply disappeared, their value completely gone. Can anyone see the price of their home declining by similar amounts? My home would have to decline to under $20,000 to match the price declines listed above. Are any homes going to simply disappear and lose all value in the near future? Not very likely.
Home prices today might be overvalued, and they may see some price depreciation in the future, or they may not, but to call today's housing market a finacial bubble is historically inaccurate.
Sunday, January 15, 2006
Why the Dramatic Rise Occurred
Why have home prices risen so dramatically in the United States in recent years?
Roughly five years ago the capital gains tax on homes was eliminated up to, I believe, $500,000. If you sell your home today and have a $300,000 gain, you keep all of it. If you have a $300,000 gain in a stock and sell today your subject to the 15% captial gains tax and only get to keep $255,000 (300,000 x 15% = $45,0000). Which is the better investment today? Clearly money has flowed into homes as a result of the tax change.
If the capital gains tax on stocks was also eliminated up to $500,000 does anyone doubt we would see a rise in stock prices?
The discrepency in price appreciation, at least in the area of the country in which I live, between lower and mid-priced homes vs very expensive homes also points to the elimination of the capital gains tax as a primary driver in the rise in home prices.
The town I live in has an average annual income of $70,000. In my town, home prices have risen, on average, by over 50% over the last few years. In the next town over, the average annual income is over $170,000 a year. Over the last two years, home prices have actually Declined in that town. Why?
The town is loaded with the so-called "Mcmansions". Large homes, on lots of acreage, that have been built within the last decade or two, that sell for a million dollars or more. Since the capital gains tax was eliminated only up to $500,000, the higher a home sells for, the more likely it is that the owner will have to pay some capital gains tax when the home is sold. Which has acted to keep the very expensive homes, the Mcmansions, from seeing the same kinds of price appreciation that more modestly priced homes have seen.
A home in the next town over recently went on the market for $1,300,000. The home was built a half-dozen years ago and went for just over $1,000,000 brand new. So if the owners get what they are asking, they will be getting, at best, a 30% gain. There are no homes in the next town over that were worth $1,000,000 five years ago and are today going for $1,500,000.
In the town I live in, virtually every home that was worth $300,000 five years ago goes for at least $450,000 or more today. A 50% or better rise in price appreciation.
The elimination of the capital gains tax (up to $500,000) has clearly played a key role in the rise in home prices in the US.
The fact that there is a reasonable, logical explanation for, at least in part, the dramatic rise in home prices over the last few years gives further proof that the US housing market is not experiencing a financial bubble that is in any way comparable to past historical financial bubbles.