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Michael Kinsley

Bye-Bye, Housing Boom

By Michael Kinsley
Sunday, February 27, 2005; Page B07

Pop!

That is the sound of the real estate bubble bursting. And it's a good thing.

It is obvious to me that today's real estate prices are a speculative bubble that is bound to burst. Of course, this has been obvious to me for about three decades and wrong almost all of that time. Nevertheless. One piece of evidence is the Dinner Party Index. The boom is over when more people are bored by real estate anecdotes ("My next-door neighbor got three times her asking price before she even put it on the market, from a professional mind reader who divined that she was thinking about selling. . . .") than have new ones.

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Another reason the value of your house is about to plunge is that the Los Angeles Times, the New York Times and The Washington Post all say that it isn't. A recent L.A. Times article reported that the median price of a local house had gone up only 17 percent in the past year. Headline: "L.A. County Home Prices Cool Slightly." Subhead: "Slowdown may not last." To describe a 17 percent annual increase as a "slowdown" assumes that annual gains of 20 percent or more are the norm. And the evidence for "may not last" is quotes from real estate agents whistling in the dark.

You've got a bubble when today's prices assume large future increases. If you think prices will be 20 percent higher in a year, you'll be willing to pay 19 percent more today. But if others share that belief, today's price will already be 19 percent higher. Betting on appreciation makes sense only if you are even more optimistic than other buyers. That is hard to be right now.

In Washington, where house prices have doubled in five years, The Post says, "Experts Predict Steady Gains in 2005, but More Moderate Than in Past Years." But whatever "experts" say, it is not the nature of price explosions to segue gracefully into more moderate growth. When today's run-ups are based on beliefs about tomorrow's run-ups, the self-feeding frenzy goes into reverse when those assumptions are dashed.

The New York Times also must be talking to experts. "In Housing Sales, Frenzy is Giving Way to Balance," it says. And it reports from suburban Westchester County that "Housing Market Is Still Going Strong." In 2004 the median sales price rose from $564,000 to $645,000. "More and more families are seeing the residential real estate market as the best and safest place for their money," a real estate agent says. And the article adds chirpily, "Even the ongoing problem of a lack of houses for sale in Westchester eased somewhat last year."

Like a roller coaster, a financial bubble has a moment of eerie stillness at the top. Buyers have adjusted, sellers haven't. So sales dry up. When the New York Times spins a surplus of unsold houses as a sign that "the ongoing problem of a lack of houses for sale" has been solved, it means that you had better not count on the Times to tell you when it's time to bail.

Let's step back a moment. All the housing in the United States is worth about $14 trillion. If the value of existing housing (not counting new construction) goes up 7 percent this year, which is the recent national average, homeowners will seem to be about a trillion dollars richer. But will the nation be a trillion dollars richer? No. These are the same houses, in the same place. That trillion dollars comes partly from non-homeowners, who must pay more to buy in. And it is partly illusory. If many current homeowners tried to cash in, the drop in prices would quickly wipe out that trillion.

When the price of something goes up, two things happen: the economy starts to produce more of it, and existing units are worth more. For most of what we buy, the first effect overwhelms the second and constrains it. A rise in the price of a can of tuna fish does not produce many self-satisfied anecdotes from people who have a third of their net worth in Chicken of the Sea. But real estate is different, mainly because it requires land. As the cliché goes, they're not making any more of it.

Perusing the real estate ads like pornography and imagining what our houses are worth is the great American pastime. But a real estate crash, if it came, would have some advantages. The 19th-century American Henry George explained how rising real estate values harm the economy by operating as a tax on both labor and capital. Money for labor makes people work harder. Money for capital makes people save more. Both make the country richer. Money for land just makes the owner richer. There are all sorts of complications and qualifications, but the basic point is a good one.

People do foolish things under the impression that they are getting richer because their houses are worth more. They save less, they spend more. Egged on by television commercials, they "consolidate their debts" (i.e., buy a new boat) with a second mortgage. And who really gains from soaring house prices? First-time buyers don't. Nor does anyone who plans ever to trade up. The only beneficiaries are those who are selling their last house, after a lifetime of appreciation. The bigger the house, the bigger the windfall. This is yet another thank-you from America to the so-called Greatest Generation. I'm not sure it's necessary.

And I'm not sure it will continue. I'm pretty sure it won't. So I'm going to sell my house before it's too late. Right?

Are you kidding?

The writer is editorial and opinion editor of the Los Angeles Times.


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