A report from Minneapolis reminds us how hard it is to crush out housing market optimism:
From the New York Times:
“MINNEAPOLIS, Oct. 21 – In a down real estate market, they came to buy. They came early, they came in numbers and they came with bank checks for $5,000.
“By 10 a.m. Saturday, more than 700 people filled a hall in the convention center here for what real estate agents say is the largest auction of foreclosed properties ever in Minnesota, with more than 300 houses or apartments for sale in two days. Opening bids ranged from $1,000 – for a three-bedroom house – to $729,000, for a five-bedroom house on 11.9 acres. The crowd was standing-room only, with more waiting to enter. Some were looking for homes, others for investments.”
Housing prices in the United States are falling nationwide; but in the minds of most house buyers, it is still a bull market. They have lived with rising prices for so long they now take it for granted that that is just the way things work. “House prices always go up in the long run,” they believe. But the run they are thinking of is only about 10 years long. Before that, prices rose – but only about as much as inflation. In some areas, of course, real prices rose with population and economic growth. In others, real prices fell. Overall, for the last century, there was little overall improvement in housing prices.
And why should there be? Housing is not an investment. It is a durable consumer good – one that needs maintenance, and one on which you have to pay property taxes. If it were a stock, it would be one with a negative dividend…you’d have to pay the company each year for the privilege of owning it. You can make money developing property. You can make money investing in property. You can make money building houses, too. But you can’t expect to make money buying houses.
Still, you would probably be wasting your breath trying to explain that to the crowd in Minnesota last weekend. They thought housing was the best way to make money ever invented. And they thought current market conditions offered an excellent opportunity to get in while the getting was good.
“The market’s really low right now, so you can get a good price,” said one buyer, a waitress who was not looking for a place to live, but a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”
In Minneapolis, more than half the foreclosures this year involved houses that owners were sitting on, rather than living in. They were properties that were supposed to make the owners money, not provide them with a roof over their heads.
Whatever happened to those failed investors, we don’t know, but there are plenty more ready to take their places. One man at the auction bought a four-bedroom house at the auction for $145,000, without ever seeing it:
“I just looked at the picture and thought if we got it cheap enough, we could rent it for a year, then sell it when the market goes back up.”
“It won’t always be so low,” said another buyer.
No, it could be lower.
Markets and Money