Here are some excerpts from a September article in the Los Angeles Times written by Michael Kinsley with the headline " The Heat's On in Housing: Too Many Americans Are Banking on Their Equity."
Some notable quotes, with emphasis added to especially key points in bold:
"The good burghers of Yonkers, N.Y., say that they are not racists for opposing the construction of public housing in their middle-class neighborhoods. They say that their real concern is real-estate values. Actually, I believe them. Or at least I find it plausible.
"According to one Yonkers real-estate agent, a three-bedroom house purchased for $18,000 to $30,000 in the mid-1950s would sell for 10 times as much today. For these homeowners, this unexpected bonanza is their nest egg. (Nationally, real estate is 60% to 70% of the average person's net worth.)...the real significance of the Yonkers episode may be to illustrate again how our society is being twisted and torn by the enormous run-up in real-estate prices.
"The main reason to think a real-estate crash might be coming is the huge gap between the cost of owning a house and the cost of renting one. For two decades, house prices have gone up twice as fast as rents. A four-bedroom house in a fancy Washington suburb might cost $500,000 (up from $400,000 last year). That house can be rented for $2,400 a month. Figuring everything, the cost of buying a house in Washington is more than double the cost of renting one.
"Why would someone pay twice as much to live in the same house? Yes, there are tax benefits, but not nearly enough to explain the differential. The romance of home ownership may be part of it. However, the main reason is clearly the belief that prices will keep going up. When today's price is simply a bet that tomorrow's price will be even higher, you have a classic speculative bubble. As investors in pyramid schemes throughout the ages have learned-and as stock market investors were reminded last year-the 'greater fool' theory can't be right forever."
I purposely didn't mention the exact date of the article - that's because this was written for the Sept. 24, 1988 edition of the Times - just as the housing market was heading into a slump. Many of the points the article makes are eerily similar to what we're seeing played out nowadays.
Think history can't and won't repeat itself?
5 comments:
Hey caliguy, love your blog! Keep it up!
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What's funny is I was like hmm that seems high on the rent for the house in DC. I know someone who bought a house in McLean for $800,000 and promptly rented it out for $1800 per month. This is a 1950s split level colonial.
Welcome to the housing bubble blogosphere... You are doing the community a good service.
arraya
Good post, good blog, I will be back often..
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