Housing Prices – Have People Completely Taken Leave of Their Senses?

The Chicago Tribune recently had this report:

So wonderfully Californian, Marsha Weidman’s home has it all- along the beach, far from noisy traffic, with a Jacuzzi used to watch sunsets over the Pacific.

For this, she and her husband recently paid $1.05 million.

For that, they got a trailer, built in 1971, without any land.

Plus, the family must pay “space rent,” which at two Malibu parks dotted with seven-figure trailers ranges from $800 to $2,500 monthly.

The nation’s frenzied housing boom has come to this: Even trailer parks, long the butt of jokes about tornado targets and redneck living, are enjoying fat greenback prices.

Or how about this interesting statistic:

One-third of all mortgages taken out last year were interest only.

In other words, these are people who will never own their home. Just pay the interest for the opportunity to live in house.

Or this:

Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking. (The Economist)

So what happens when people have no more home equity to spend? What happens when people stop buying houses at this frenzied rate? Where do all the new jobs go? Could be a great case of trickle down economics of the severely wrong kind.

Paul Farrell of The Wall Street Journal’s MarketWatch conducted a survey of various professionals on how they perceived the risks of certain economic bubbles. He reported:

It turns out that this is a real hot-button issue. I received 1,249 emails, three times as many as on any column I’ve written in eight years. I read every response.

All told, 86% of you scored the bubble risks at 50 or more. And 39% scored between 75 and 100. Only 14% scored under 50.

Many of those who emailed identified themselves as officers in banks or securities firms, professional financial advisers, corporate executives, federal and state government professionals, mortgage bankers, building contractors and real-estate pros. They scored the bubble risk as very high.

Comments by real-estate pros stood out because the housing bubble is likely to be the lead domino triggering a global economic meltdown. Real-estate respondents from Michigan to Florida expressed almost unanimous concern about this bubble.

“This bubble is no myth,” wrote one California builder who said he had ‘been around for decades.’ “Real estate will go back to the Agricultural Age. Get ready for deflation.”

“Warning signs are everywhere,” said a New York mortgage banker. “Rates went through the floor, prices to the moon. I sold everything a year ago, paid off debt. The Great Depression will look like a cakewalk.”

One of my dad’s hobbies is economics. He’s been talking to my husband and me about the housing bubble for years, long before it was in every newspaper in America. The housing bubble was one of several factors that made us decide to stay where we are for now. Looking at houses up north a few weeks ago, it was striking to us how overpriced everything was. The last thing we want is to buy a house that is overpriced and end up with a mortgage much larger than our house value.

If there is a housing bubble and if it blows up (I think burst may be too gentle a term), it is not just the people who are seriously overextended who will suffer the consequences. I can’t imagine anyone will not be impacted in some way. As I said before, if we make prudent plans and nothing happens, we’re just out a little of our time and a little money. If we don’t take prudent steps and something happens, we will have to live with the consequences of our choices.

Edited to add: Here is another blog that deals with the housing bubble news: The Housing Bubble 2. I’ve just started looking through this one myself.