Thursday, October 18, 2007

Speculation on Home Prices

The real estate news is bad. Some are now saying it will be 2009, at the earliest, before property values recover. Apparently the tax base for cities is eroding because of the decline in home values and the rise in foreclosures. An ordinary house is an expensive thing. Not just in terms of what it costs, but also in terms of what we take for granted about it. In that regard, four basics are lately coming into question: financing, transportation, public services, and water. On the financial front, house prices have risen because we have had money, and have been willing to spend that money on our homes. We have had money, in the earlier years, because America was a rich country and getting richer and, in the later years, because foreign investors could make money by lending their money here. That second tenet is now failing because the value of the dollar has been falling. They say that a foreign investor -- an Asian investor, say -- who invested in the stock market in 2000 has lost money, despite the Dow's rise, because the dollars in which stocks are priced have lost so much value. The dollar fall has not stopped; indeed, it may have a ways to go. Thus, foreigners are increasingly looking to invest elsewhere. Transportation becomes an issue when people cannot afford to get to the place in question. As long as the money is there, the government can keep building highways, people can keep buying cars, and cars can keep burning gas. This piece of the puzzle is still in place. But gas is becoming more expensive as it becomes rarer for us (you don't find much oil in the Quaker State anymore). Hopefully the experts will develop vehicles that run on alternate fuels -- hopefully other than biofuels, which entail the questionable water- and (for some countries) starvation-intensive prospect of, basically, burning food. But it still costs money to build highways, and rising numbers of people still have to jostle for space on increasingly congested roads. In the long term, we would have been further ahead if we invested in mass transit. But the point here is that there are limits to urban sprawl. One, long known, is that people won't drive five hours each way to work. But another, less familiar, is that suburbs may not keep expanding outwards forever. At some point, there may be a frontier where you are essentially gentrifying -- where you are buying a piece of land that, in the past, was not used for purposes of housing your kind of people, and you are betting that it will be continue to be used for that purpose in the future. And some of those people on the fringe, in some places, may have bet wrong. The ability to build highways goes along with the ability to provide public services generally. Again, as long as the money is there, there is no problem. But cities are running into difficulty now. Their tax bases are taking a hit because of the drop in house prices and the rising number of foreclosures. Empty houses don't generate tax revenues, in which case cities can't provide everything we have gotten used to. With fewer people paying property taxes, and those taxes not rising at the expected rates, cities will have to increase fees and taxes if they are to keep providing the services we expect. For each additional $50 per month of property taxes and other service fees, there will be some people who are priced out of the housing market. So the drop in the tax base may have its own self-perpetuating dynamic to some extent: as fewer pay, costs rise, so even fewer can afford to pay. Among those public services, water is particularly worrisome. There is not enough of it, and there will be less. Even if the cities could continue to afford to supply the same levels of services, there have to be the resources for them to supply -- the water, in particular, but to an increasing extent the electricity as well, particularly during peak periods. There is no long-term plan in place, at present, for resolving the nation's (never mind the world's) shortages of water, electricity, or, for that matter, food. We have largely squandered the opportunities we have had to take leadership in such matters during the past two generations. It will be harder for us to do so in the future. China will run into extreme problems along these lines before we do, but we will have those problems too; and to the extent that China owns us, there may be some very interesting deals made in the future. Most likely wars will be fought for such things, and they will not always be wars involving uniformed armies. If you are a homeowner, you are valuable to the wealthy people only as long as you continue to be a vehicle for production of wealth. The system on which you have been that sort of vehicle is now undergoing extensive modification. Your house is becoming a less reliable way of creating transactions in which realtors, lawyers, bankers, et al. become wealthy, and that means that your own value is declining: you are no longer capable of serving as a conduit for the generation of wealth through the automatic operation of a system of rising house prices. If you are to continue to have value in this system, you must achieve it by having stable, good-paying employment and an ongoing ability to make your house payments. Of course, you may still be vulnerable to a decline in your home's value, to the point that some people will be working to make payments on a combination of mortgage and home equity loan that puts them under water. In other words, some will ask themselves why they are struggling to keep a house that's worth less than they owe on it. Regardless of your own stability, your operative assumptions will continue to mutate as your neighbors ask themselves questions of this sort. The time to buy is when nobody wants the thing you are buying -- assuming, of course, that they will want it later. The time to sell is when everyone wants the thing you are selling -- assuming that you won't then have to turn around and buy it back at a higher price later. When *everyone* was buying a house, when it was *obvious* that everyone should buy a house -- that was the time to sell. People will be buying shelter again in the future. It is not yet clear what form of shelter will be most attractive. Resource questions will likely influence this issue.