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April 18, 2005

Global housing bubble? $20 trillion value increase in 4 years.

-- by Thomas Leavitt

Opened up the copy of Parade Magazine packed in with my Sunday paper... this little gem caught my eye:

Housing prices aren't just skyrocketing in the U.S. In the years 2001-2004, they've risen by $20 trillion in developed countries worldwide.

Here's the full article - their source is The Economist, in a report published near the end of 2004 (so it doesn't take this year's craziness into account).

Here's what the Economist has to say in an article dated March 3rd, 2005, entitled "Still want to buy?".

[...]if rents continue to rise at their current annual pace of 2.5%, house prices would need to remain flat for over ten years to bring America's ratio of house prices to rents back to its long-term norm. There is a clear risk prices might fall. [My emphasis. -TL]

Here's how that article ends (talking about SF Bay Area real estate valuations):

To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.

Want to see something frightening? Type "economist housing prices" into Google. What comes up? How about an economics column in the Christian Science Monitor with this lead:

Economist Dean Baker was so worried about a housing bubble that he sold his Washington, D.C., condominium, at three times the price he paid for it, and rented an apartment instead.

Note: this same economist declared that there was a stock market bubble in 1997. Three years early. He sold his condo two years ago.

A year ago, the Washington Monthly ran an article entitled "There Goes the Neighborhood: Why home prices are about to plummet--and take the recovery with them." Here's a quote from it:

Virtually every housing economist is concerned that prices may be unstable, and growing numbers are becoming outright alarmed.

I lived through the dot.com bubble... all I have to say is that, if I owned a house today, I'd sell it. Unfortunately, I'm now a renter (sold my house a year ago), so I can't capitalize on this bubble... at least not yet. :/

On the other hand, long long term, I have to be bullish - California is going to have to pack in millions more people over the next few decades, and given that there is a fixed supply of land in the state, the laws of economics make the ultimate result pretty obvious: price increases. That said, it can take quite a while for prices to recover after a crash (as the NASDAQ and the SF Bay Area tech job market demonstrate).

Posted by Thomas Leavitt at April 18, 2005 10:11 PM

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