According to the latest stats, American home prices are still on the rise – in most major markets across the nation.

The National Association of Realtors published a median increase of 4.2% from 1/06 to 4/06. Compare this figure to the published 16.6% last year.

Although prices appear to be leveling off, many economists don’t predict a sour turn for the worst. If housing prices were to weaken, logically the fed would cut rates. This is clearly not happening with rates at a 4 year high (currently 6.7%). A clear indicator that the housing market is still strong. And it would take a serious and unexpected shock to our economy to change that. Year on year, aggregate average US home prices have not fallen since the Great Depression.

So what does this “slower” growth mean to the economy as a whole? And why should I care about housing prices, if I currently am not a homeowner?

The housing market is a powerful motor which drives an economy. Homeowners “feel” richer, and that drives consumer spending. If housing prices stopped rising at these sharp rates, and only increased moderately from year to year (or remain stagnant), this has the potential to create a serious dent in the economy as a whole.

Even the non-homeowners like myself will surely be affected. And I’m a little bit worried.

My first blog entry, and my 2 cents.

I’m interested in housing for two reasons. First, I’ve been considering the purchase of an investment home. I’ve read a ton of material about this topic in the last year. I’m thinking: real estate = millionaire down the road? So, keep it coming!

Second, based on what I’ve read, I don’t think it is likely there will be any collapse. That is, there won’t be any overall housing market collapse. However, it is likely that some local markets will take a huge hit. Taken as a whole, the market won’t drop but some submarkets might take a big hit.

Welcome to the family, Avi.

Great points about consumer spending. Some economists have expected spending to drop as gas prices and general inflation went higher, but US consumers have seemed generally unaffected so far. The two reasons people sited for this are rising wages and the booming housing market. Now with both of those things slowing down, should we expect a gradual lapse in consumer spending or an all out collapse? That’s the question I suppose.

In our local market, we are starting to feel the panic of new owners who have been relying on appreciation to pay their mortgages.

I’ve run into several people who have 1-3% interest rates on their mortgages and still have to borrow from their home equity line to make the payments. If we have a combination of stable values (no more equity to borrow) and higher interest rates (causing monthly payments to double or triple), these owners are going to bail immediately. Who wants to hang on to a property with an $8,000/month mortgage if values aren’t increasing and they can rent the same house for $2,000?

The only question is, how many owners are in this tenuous position? From what I’ve seen, new tracts are full of them. As soon as a few sell, the stampede could begin. Mature neighborhoods are probably immune from this scenario, but they will be affected by the change in the economy when people stop using their equity lines to buy cars, boats, RV’s, vacations, home improvement projects, etc.

I’m concerned because our local economy seems prosperous at the moment, but it’s based on a credit card mentality and is not sustainable.

That “feel” richer is a dangerous thing. IMHO, I think if the politicians helped job creation, that would create a “feeling” of stability, and consumer spending would increase.

I think Fed is much more worried about housing market not slowing down rather than the other way around. By raising short term interest rate higher, it will cut off liquidity to the speculators slowly. Fed has being warning the banking systems on the ARM loans by asking banks to raise up the reserve for loan loss, and also asking banks to have a more stringent criterion before issuing such loans.
My personal belief is that housing market has passed the peak, if not at the peak. The bubble will be bursted when there are so many people think that “real estate = millionaire”.
I have two posts that are on this topic:
Unconventional Strategies in this Housing Market and
How Much Housing Market Will Fall.

I am amazed that anyone buys real estate in expensive markets when they could rent the same property for far less. I own 5 rental properties in Ohio. I spend a significant amount of time looking for an evaluating each one before I buy them. They each produce a positive cash flow and will hopefully appreciate about 4%/year. In 15 years they will be paid off and I will have a nice income stream to supplement my regular income. At the same time, since they produce a positive cash flow, I don’t spend any money to pay them off, just a little bit of work to maintain and rent them.
I will soon be moving to the Seattle area though. Even though I make good money, I can’t imagine buying there. Houses are insanely priced relative to renting. The only reason that the housees are so expensive when people could rent a similar place for far less is because of speculation! Houses may continue appreciating at 10% or 15%/year forever and I will be wrong. But common sense tells me that counting on wild appreciation is foolhardy.
Here is some advice. Don’t buy a property unless you have a positive cash flow. If the house appreciates 10%/year, congrats. If not, and if it possibly depreciates by 10 or 20 or 50%, then you won’t be in too big of a bind, because you can live there on a reasonable mortgage or rent it out with a positive cash flow forever and ever.
I hear of so many smart 20 something folks making $50k or $100k as program managers, engineers, etc who don’t have enough sense to realize they are investing in something that will make them poor.

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I would like to know where I can buy a steel container, for $10, as stated in your article “Living in Boxes?”

Do you have any other writings on creating these houses?

Thank you!

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