Many journalists don’t understand Real Estate

The front page headline in my local newspaper today reads “Families pile on debt” with the sub head reading “But rising real estate values help homeowners.” Once again I am surprised that conflicting information is often presented as complimentary by the mainstream press. Maybe I shouldn’t be, but I am.

The article in question quotes the fact that U.S. families carried a median debt load of $41,300 in 2001, but in 2004 the load had climbed almost 34% to $55,300. It stated that because of the increase in home prices, household net worth barely increased. But is this net worth really there?

If fewer and fewer people can afford to buy homes; then is the reported value, and corresponding net worth, a reality? I believe this is a phantom creation of net worth. While our taxing authorities love the higher reported values on which then can base ever higher taxes, these ever-escalating prices must, at some point, stop or drop to allow incomes to catch up. (If you don’t believe me ask the speculators sitting on homes in markets that are now experiencing cessations of increases or price decrease corrections in their home pricing.)

While the idea that high home prices somehow compensate for increased debt loads seems to make sense at first blush, but there are some issues that need to be folded into the mix to understand the entire issue. First, consider that a huge amount of the increasing debt is tied directly to the “higher valued” homes via equity lines, 100% financing and refinancing covering at times up to 125% of the home’s escalated value. Still, you could argue that the market is what the market is and that if people are buying at inflated prices then those prices are representative of values. Therein lies one of the problems, are people buying, and if so, who are they?

In the last 5 years, we have seen areas where the price of a median–price home has doubled. You’ve heard about some of these areas as Mecca’s of great real estate investment. Cities like San Bernardino, Sacramento, L.A., Long Beach, Miami, Fort Lauderdale, Cape Coral, Fort Meyers, Washington, Arlington, Phoenix, Las Vegas and others have seen huge increases in home prices. However, before we get too excited, let’s ask some other pertinent questions.

In the areas where homes have doubled in value, have the incomes of the people living there doubled in value? Has the ability to meet mortgage obligations of the average buyer in these areas doubled? Has the population in these areas been rising fast enough to absorb the speculative development and building booms they are experiencing? If debt is escalating as fast, or even faster, than home prices, when does the market finally get to the point where the bubble breaks? When will people stop buying because they simply cannot afford to make the payments? What I believe you’ll find is that much of the upward movement in home prices is not owner-occupied market driven, but instead has been fueled by speculators and investors.

USA Today’s front page article of June 27, 2006 sums it up nicely; “Buyers in more markets find housing out of reach.” This article sites 30 metro areas where housing prices have gotten so high that more and more people simply cannot afford to purchase. So what do you think will happen to the prices in those areas now?

I believe that when long term owner occupants can not afford to purchase at the higher prices, the speculators will move out of those markets and into others. It simply will not be profitable for them. When this occurs, it will take some time for incomes to increase sufficiently to make the homes affordable again, or the prices will have to drop. This cycle has been and always will be part of the business. Unfortunately those who are hurt the worst are those who can least afford the higher prices caused.

While all these issues are problematic for single family detached housing, they all point to increased opportunities in multifamily housing. Since Americans still hold the dream of home ownership, more affordable housing in specialty multi-unit developments should see resurgence. Condominiums, town homes and row houses are all primed for upswings. P.U.D.s are more and more popular and the rental market appears to have a strong and prolonged period of growth ahead. For professional real estate entrepreneurs there is always opportunity because there is always two sides to the “coin” of each segment of the real estate market.

The financial realities of higher American family debt loads and family incomes not keeping pace with housing prices all point to interesting times ahead in the real estate marketplace. I think it would be wise to look for cooling of the rapid growth in single family prices and increased demand in the other noted housing areas.