The Coming Real Estate Bubble

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The Coming Real Estate Bubble
Andrew Harrer/Bloomberg via Getty Images
By Megan McArdle

Three-and-a-half years ago, my newly married household acquired an actual house, a 1,750-square-foot slice of paradise in Washington's Eckington neighborhood. In real estate euphemism, the house is what's known as "lightly renovated," the neighborhood "transitional."

"Lightly renovated" meant that some stuff had been done, most of it badly, but the HVAC dated from the Paleozoic, and the yard ... um, better not to speak of the yard, unless you're a Hollywood location scout looking for somewhere for your heroin-addict protagonist to bottom out.

"Transitional" meant ... oh, you can figure it out. We had gone north of H Street and east of North Capitol to the unfashionable precincts of the city's Northeast quadrant. The most common response, when we told people where we lived, was "Where the hell is Eckington?" The second-most-common response was, "Wow [rapid eye-blinking]. I could never live there. It's too far from everything." *

Now some of the same people who politely suggested we were crazy for buying so far east are lamenting that they can't afford to buy in our neighborhood. Lest you think this is schadenfreude, let me point out that some of these people are friends I very much want to live near me; I would even give up a little of my real estate price appreciation to make that happen.**

The point is, something insane has happened to Washington real estate prices in those intervening years. There's a feeding frenzy over single-family homes in neighborhoods that are barely within walking distance of a metro. This cri-de-coeur was recently posted on a local real estate blog:

My husband and I are in the process of purchasing our first home.

Our realtor has put a focus on the Edgewood and Brookland neighborhoods since it previously looked like you can still get a house for a reasonable price.

However we have been baffled by these two recent purchases.

Are we really looking at spending nearly $600,000 for an up and coming neighborhood? Have we missed some big announcement for something coming to the area? Are we ever going to find something in our price range of under $500,000 if we want to stay in the District?

We are becoming discouraged.

Brookland and Edgewood are two neighborhoods even deeper into Northeast than ours.
These seekers are not alone; I've heard this from a lot of people who want to buy a house. The bidding wars, which were common enough when we were looking, are now frantic: People are waiving inspections and practically any other contingency the bank will let them get away with, and also paying 20 percent to 50 percent above the asking price. I feel like I've seen this somewhere before ...

Of course, I can name reasons that prices should have zoomed up in 2012 and 2013. Washington's job market is far more insulated from economic vicissitudes than the rest of the nation -- indeed, the extra government spending creates jobs here (though not as many as you might think). So it's not necessarily surprising that more affluent professionals are trying to get their hands on the one thing Washington isn't making any more of: single-family homes.

But that doesn't really explain why the same buying frenzy is happening in San Francisco.

OK, tech billionaires. But what about New York, where you also hear the same stories about Brooklyn neighborhoods? Finance may not have suffered as much as you wanted, but the Masters of the Universe have not become richer, or more numerous, since 2008.

Of course, there's a nationwide housing recovery. But what you see, when you look at the S&P/Case-Shiller index, is that the recovery is uneven, even in urban areas.

For urban residents, S&P/Case-Shiller dramatically understates things, because it covers the whole metro area. %VIRTUAL-article-sponsoredlinks%If you look at Trulia's (TRLA) estimates of price per square foot, you see things much more clearly: San Francisco, New York, Washington and Boston now have prices above their 2008 levels. San Diego, Seattle, Los Angeles and Chicago don't. Which is why occupants of the former cities are spending so much time complaining about the crazy cost of real estate.

Now, I thought we all agreed that in 2008, prices were too high, and there was a big bubble. What are we to think of even higher prices in 2014, when the economy has been staggering along on life support for six years?

I can tell a story about these cities in which they're somehow special and the money will just keep rolling in. But I can also tell a story in which people are paying more than they should for houses in my neighborhood on the assumption that today's $750,000 house will be tomorrow's $1.5 million retirement fund, even though incomes in D.C. can't really support an entire city's worth of seven-figure homes. I might even tell a story where today's ultra-low interest rates give several cities full of smart upper-middle-class professionals a badly contagious case of money illusion.

Which of these stories is correct? I'm not sure I know, and indeed, the answer may be different for different cities. But there are two things I do know: I'm very glad we bought our house in 2010. And I'm not going to count on any of our newfound equity until I see what happens when the Federal Reserve really begins to tighten up the money supply.

* Less common, but no less remarkable, were (from a cab driver) "I didn't realize anyone lived there" and (from a staffer at a liberal think tank) "I could never live there -- I have kids." As if we crazy denizens of Eckington might poison them when she wasn't looking.

** Cheap talk, of course, since we've no intention of moving.

9 Numbers That'll Tell You How the Economy's Really Doing
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The Coming Real Estate Bubble
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.

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