Several Federal Reserve officials have been recently trumpeting their belief
that there is no housing bubble. Having completely missed the stock market
bubble, one should recognize such self -serving comments for what they are,
desperate attempts to blow additional hot air into one of the two biggest bubbles
in the U.S. economy (the other being the bond market).
Although I do not recall his exact words, in the late 90’s Alan Greenspan
responded to questions about the rallying stock market to the effect of “no
one can tell a bubble in advance,” or “how can we question the wisdom
of investors making informed decisions, ” or “only with the benefit
of hindsight can we tell if a market is a bubble.” Given its prior myopia,
when did the Fed develop such clarity in detecting bubbles?
In any event, these sentiments are in contrast with a report issued today
by the International Monetary Fund in which they warned the United Kingdom,
which has experienced a similar rise in home prices, that “domestic demand
is being sustained by high and increasing levels of household debt, fueled
by house price inflation and low interest rates, which calls for heightened
vigilance to these risks by the authorities, especially regarding the possible
existence of a housing price bubble with its potential deflationary consequences.” Notwithstanding
what the IMF says to Britons, I see more evidence of the bubble in my own backyard.
Although I’m sure you could find your own anecdotal examples to point to,
I recently leased a somewhat modest house in Newport Beach, Ca. currently “appraised” at
1.1 million for $4,700 per month. Some (my wife included), might say that $4,700
per month is a lot of money to “through away” on rent. However, I
calculated that the after tax cost of buying that house (applying a standard
20% down payment, 6% fixed 30 year mortgage, $450 per month home-owners association
fee, 1.4% property tax, $100 a month gardener fee, $250 per month home owners
insurance, and the lost after tax income on the $220,000 down payment otherwise
invested in a conservative New Zealand REIT paying 9%) would have been about
48% higher than the cost of renting it. (Of course, this does not even take
into account any closing costs, maintenance, or depreciation of improvements).
And then there is the leap of faith inherent in buying this “$1.1” million
house that sold for less than $700,000 four years ago. From my perspective,
that house is looking more and more like Amazon.com at $100 per share.
Though currently leasing, it is my expectation to be able to buy this house,
or something similar, out of foreclosure, sometime in the next few years, for
about $500,000, a sum which will most likely be exceeded by the than appreciated
U.S. dollar value of my current $220,000 presently invested in the New Zealand