Thursday, January 3, 2008

Houses, Rents and Bubbles

You can read the WSJ's Real Time Economics blog post here.

For the second time today I am reproducing a comment on a WSJ blog.
There are a lot of sharp people out there.
Here's one of them:

...Davis is correct. Housing valuation has two components and should be represented that way. The “little boxes made of ticky tacky” sold for $8,000 in the 50’s. They are now worth $400,000 based on LOCATION. Selling and moving to FL and buying a much nicer box for $400,000 is a no brainer. Levitt made the mistake of building in FL for the Long Island/second home crowd and not the FL crowd. The the towns and insurance companies moved in and escalated the yearly cost of home ownership to un-affordable levels for everyone. The double whammy.

A 900 sq/ft house on three acres can have a much different value than a house on 1/8 acre. To the renter, they are the same. A house in California may rent for $8000 and the same house in the Midwest may rent for $900. The difference is LOCATION and SUPPLY.

What is going to drive long term future housing prices and rents are Energy and Taxes (monthly expenses) and Location (monthly income). It is the Supply that has a temporary effect on rents and local housing prices. Rents and housing prices are not related when there is an oversupply. A renter can rent a house at a discount, if it was built for the wrong market. For the low volume landlord, other factors, aside from market valuation are considered when establishing rents. If you can pocket the depreciation and inflation, that’s the right rent. When you sell, you effectively pay capital gains rate on the depreciation and appreciation unless…..

The Supply issue is transient. Much of the current oversupply was built for the wrong (un-sustainable) market. The prices never reflected local sustainable conditions. Some increase in local prices did occur based on reduced mortgage rates. With flat incomes and an increase in mortgage rates, prices will drop. Flat incomes and flat home values are inevitable. The taxman had no business raising local taxes when the local incomes were flat.

The banking sector, the taxman, the credit card sector, the energy sector, the communications sector, the entertainment sector, the hard goods sector all think each can get a bigger piece of the pie from a person’s flat income by encouraging borrowing. It can’t be done, you can only handle so much debt, especially adjustable interest debt, on a flat or declining income. Plus, we are experiencing income shifting, which affects consumer spending (one $2000 handbag vs 100 $20 handbags). It makes for a very, very, fragile economy. Allowing an army of cheap immigrant labor into the country and outsourcing jobs has a price.

The talking heads should shut up about “consumer confidence” and “declining housing values” influencing spending. It’s the weekly paycheck and whose pocket it goes into. It ALL gets spent for a majority of the people, regardless of income. Let’s make a deal, if you reduce oil to 18 cents a gallon, I will turn on my heat AND go out to eat. Tip: go long on down jackets. Wear your environment like the Eskimos.

BTW, we are headed for the next de-regulated bubble. Energy dictates the future. We could have $150 oil shortly. Speculators are going to distort the energy sector. It will be the next “sub-prime” play with all the bells and whistles to multiply the effects of the price changes with all the various players impacting prices and inflating the economy as a by-product. The banks and Equity will be in the middle speculating, side betting, and securitizing and the next “sure thing” will eventually implode. The economy will continue to head South, literally. Manufacturing will go where wages are low and energy regulated.

No one has even mentioned a declining economy, inflation and the crime rate/cost. It is getting more expensive to be poor while the poor population increases legally or otherwise. Another double whammy.

Comment by Anon - January 3, 2008 at 7:50 am