Thursday, June 02, 2005

All Things Financial - A Personal Finance Blog

All Things Financial - A Personal Finance Blog

Another good find by JLP at All Things Financial. The subject of the post is a WSJ article showing the Case-Shiller home price index. Real home prices have had the following history since 1996:

1996 -.50%
1997 2.10%
1998 5.40%
1999 5.40%
2000 5.80%
2001 5.80%
2002 8.10%
2003 8.50%
2004 11.20%

As always, statistics include hidden stories. Averages can be deceiving.

The fact that ocean front condos in South Miami Beach increased in value by 40% or more in 2004 has little to do with "home prices" nationwide. However, when several thousand two to 20 million dollar condos quickly become 2.8 to 24 million dollar condos the national average gets a little tug. Add all the other ocean front condos in Florida and the tug is larger. Add all the ocean front condos in the entire US and you get a major distortion in "home prices". Until a couple of months ago, the over valued Eurodollar was boosting sales of ocean front properties all the way up and down the east coast. The Eurodollar pressure on prices has recently subsided. Prices will continue to rise but the pace has slowed.

It is true that the coast lines are not the only hot spots. Washington DC is another town on a roll. The most recent year over year increase in DC was 23%! NC, a state with a large manufacturing labor force, had a 2004 increases of only 6%. It is confusing for someone to tell a North Carolinian that we are in a housing bubble. (He is not confused but is rich if he owns ocean front in Brunswick County.)

What astute real estate investors know is that single family homes in non resort areas are relatively stable. They go up in price about 4% per year on average and seldom trade down in price. On the other hand, resort areas where the "homes" are typically second homes, the prices are volatile. Resorts go through what are know as "jump phases". We are currently in a jump phase for vacation homes.

No one knows how long this one will last because more people than ever are at prime buying age for second homes. There will be more people than ever at prime buying age for 7 more years in a row!

The main reason resort homes are difficult to price is because the money made on them is not from rental income. In this way, they are like growth stocks that pay little or no dividends. The price paid by the investor is too high to recover from rental income except in the very long-term. However, if one pays a million for a beach front condo, he has invested in real estate that has a very important characteristic; location, location and location. History says that the buyer will be able to sell it for 2 million long before the rents pay off the mortgage.

The excessive talk about the real estate bubble has scared away a lot of buyers. Many of them are now putting more money into the stock market. Stocks are bubbling now and my family is enjoying a bubble bath.