onewaypockets thanks for the Excellent article. Exactly my thoughts on Greenspan and the real estate market. Greenspan is/has been a typical bureaucrat w/no hram(borat's expression) Volcker should have been credited for the US economy's success in the late 90's not the un-clairvoyant overrated Mr. Maestro..
yenzen>Nah, they'll invent a 50 year mortgage after prices hit 400k In addition to mortgages with amortization schedules longer than most people could reside in the dwelling, one alternative used in some parts of Europe (i.e. London) is to separate RE transactions into: sale of freehold sale of leasehold A freehold sale is that category which most Americans think of when they hear residential RE sales. A leasehold sale is familiar to those Americans familiar with rentals of commercial RE, where a long-term lease with below-market rent is a tangible asset which can be bought and sold. In US leasehold sales, the remaining lease term is usually not more than a decade or two. However, in London it is not uncommon to see advertised a leasehold with a term of 100 years or more. And people can get mortgages for purchasing just the leasehold without the freehold. This allows separating the financing of a residential purchase from a RE investment. This bears some analogies to the securitization of mortgages here in the USA. (The British monarchy is one of the largest freehold owners.) SteveD>A car is a depreciating asset!!! .... A house will last for over 100 years, for God's sake. It is, in most cases, an appreciating asset. Once the loan is paid off you have something of value. A properly built house will last over 100 years. But, this assertion is based upon observing houses built 100 years ago which are still standing today. The quality of construction which allowed those to last a century is quite different from the trend of reduced quality becoming more pronounced since WW2. Tract homes built for returning WW2 veterans were slapped together and are being kept together only through significant maintenance. Even today, the quality of construction varies widely, and only very expensive homes are built to the standard of quality which was common in prior decades. Even the oft-abused term "luxury" is often associated with shoddy construction. (As just one example, in recent years was a major class-action suit in Texas for housing materials which deteriorated due to mold.) When colleagues visit from Europe and see how American housing is constructed they sometimes wonder why they are built so cheaply. In Europe, it is more common for a house to stay in the family and be pased down from generation to generation. Hence the desire to build something which will last long enough to allow for this. I've sometimes explained that Americans tend to move from one dwelling to another at different stages of their lives, so they view it in a more utilitarian fashion of only having enough quality to last for the duration of their residency in a particular dwelling. Another factor relating to longevity and appreciating values is the cost of additional investment into renovating a dwelling. When people cite those post-WW2 tract homes which appreciated from $20K to $300K over 50 years, they are not accounting for the cost of renovations performed over the years. Do you really think that over 50 years a house has retained its originally installed roof, siding, insulation, flooring, appliances, lighting, windows, heating system, plumbing fixtures, kitchen cabinets, etc? What's more, too many people try to refer to such improvements as investments. However, Consumer Reports in their November 2002 issue reported the increase in home value as a percentage of improvements cost. In no case was there a positive ROI from a pure investment perspective. In other words, such renovations are a depreciating asset, an expense, rather than a capital investment. There's a lot of subjective opinion back and forth on this thread. If you are seriously interested in getting more objective numbers about this topic, perhaps you might read more at Harvard's JCHS (Joint Center for Housing Studies): http://www.jchs.harvard.edu
KC, I enjoyed your post. I had to laugh about 1 part though: Quality of const. 100 yrs ago. I'm in the RE business. Maybe this observation is just for the US, but I doubt it. Our old homes have such antiquated mechanicals and lack new structural improvements. Even the brick work was usually held together with lime and sand only. They didn't have portland cement then. We just tore 1 down about 2-1/2 yrs ago. Built in 1890. Lead water and drain pipes, horrible wiring (scary), ancient old fuse box that was overloaded, 3/8" main water supply, horrible double-hung windows, negative drainage (cause in the old days they had level finished lots that then settled), stone foundation rotting out and too shallow, no perimeter drainage, 5'-6" "basement" ceiling height, no insulation and on and on. It was an attractive Victorian in sad shape. Much easier to tear down and start over. Today's house could be better built, but it is so far superior to what was being built here 100 yrs ago on average. The worst part about new homes is the press-board siding and small lots. And some people like plaster over drywall. Just my opinion based on having to bring homes up to today's codes. Don't mean to rain on your post, but I had to write this. I've seen inside the old walls.
Most informative discussion so far. I would add emphasis to materials of construction. As global commodity prices rise, builders will have to charge more for their product. The cost of new homes will go up directly, existing homes indirectly. This could be the largest factor underlying housing inflation.
Billbuild>We just tore 1 down about 2-1/2 yrs ago. Built in 1890. .... Today's house could be better built, but it is so far superior to what was being built here 100 yrs ago on average. I hear what you are saying and agree, but put it in some context. That house you tore down did in fact last 100 years, after which time it was no remaining value. How many tract homes built in the late 40's and early 50's will be in better condition in the year 2050, than that victorian you tore down? To make this an apples-to-apples comparison, you must assume the same amount of renovating as was put into that victorian. Most American homes dating back to just after WW2 have had more spent on renovations than was spent on building the house in the first place, so you have to adjust your comparison to account for that context. Most people don't discount the cost of renovations when calculating the ROI for increased valuation. Suppose you start building a non-luxury home on a spec basis (before knowing the customer and what he is willing to pay extra for) but you decide to go ahead and use quality materials: *) 2x6 studs instead of 2x4. *) 16" or 12" joist spacing rather than 24" *) TJI laminated joists rather than 2x10's *) plywood subfloors rather than T&G OSB *) plywood sheathing rather than wafer board *) wood rather than vinyl siding *) conduit rather than nomex/romex *) etc Question1: assuming it was speculative built, are most builders sure they can recoup extra ROI for the higher quality? Question2: will the average buyer unknowingly pay almost as much for the house built with inferior materials as they would pay for the quality home? Question3: if you were building a spec house that you planned to sell quickly as a business deal, would you use the same quality of materials as if you were building a house for yourself that you planned to stay in for many years? Question3a: If building a house for yourself which you thought you might flip in 5 years, would you put as much quality into it as if you planned to keep it and hand it down to your children? Question4: Considering that many small private homebuilders are better at construction than they are at business and cash-flow management (not referring to you personally) then even if they agreed to use quality materials in a non-spec custom-built house, how many hit cash-flow crunches which force them to cut corners which violate their contract with the buyer, but knowing that buyers often won't catch most short-cuts until it is too late? How many of these short-cuts call into question the ability of housing stock to appreciate in real value over the life of the mortgage, without continuous infusions of maintenance dollars?
Good point regarding renovation adding to the longevity of a house. Indeed, at what point does it become "new construction" disguised? There's a story of the curator demonstrating the ax used by George Washington to chop down the cherry tree. It's totally original, except restorationists have had to replace the handle and the blade.
NickelScalper>Good point regarding renovation adding to the longevity of a house. Indeed, at what point does it become "new construction" disguised? The quantitative answer to your question might possibly be suggested by the JCHS annual SON report: Table A-2 Housing Market Indicators 1975-2003 pages 32-33, in the group of columns: ($B 2003 USD) RESIDENTIAL UPKEEP & IMPROVEMENTS 120 Single-family 57 Multi-family VALUE PUT IN PLACE (new construction) 306 Single-Family 34 Multi-family 125 Additions/Alterations In other words, for every dollar of new construction added to the housing stock, there is about 88cents of additions/alterations & renovations invested in the housing supply. In other words, half of money put into the housing stock is not going towards increased capacity but towards sustaining or boosting "valuations" of existing supply.
Although the contributing factors were numerous, the last major depression ('29+) was triggered by the stock market collapse which precipitated an acute crisis in the banking sector (loan defaults). Perhaps the next depression will result from a collapse of mortgage insurers. The 20% padding you indicate above notwithstanding, is it possible that insurers are overextended? Do said insurers have their ways of dissipating the risk? I ask you because I know nothing about RE and you appear to know a great deal.
Here's my take: Even though housing is nominally "durable," it does, in fact, represent a diminishing capacity. So, extending the usable life-span of "existing" housing through renovations is, looked at this way, an actual addition to housing stock.
Interesting enough, the minutes of the last Feb meeting pointed out the "anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums". But I think Greenspan is doing too little and too late to cool the housing inflation. http://story.news.yahoo.com/news?tm...20050104/ap_on_bi_ge/fed_minutes&sid=95609868