Bryan Caplan  

Housing Bubbles? A Fact and a Thought

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James Hamilton's got my attention on housing bubbles. One of his many interesting observations is that population growth may explain a lot of the variation in real estate appreciation:

It's noteworthy that over the last 5 years, the three states with the highest population growth rates as reported by the Census Bureau-- Nevada, Arizona, and Florida-- have also been among the locations that saw the biggest increase in home prices. Forces such as these, rather than a random distribution of irrational exuberance, seem a more natural explanation for why some communities got bubbled and others didn't.

Getting data on 2000-5 turned out to be a bit of a chore, but data for 1990-2000 was easy to come by. Does Hamilton's story work for the 90's?

The answer is: Marginally. The simple correlation between a state's population growth and its real estate price growth is .29, and a 1 percentage-point increase in population growth is associated with .57 percentage-point increase in real estate prices.

That's just a bivariate regression, of course. To put matters in perspective, if you "race" population growth against variables like Kerry's 2004 vote share or the level of (not change in) per capita income, population growth matters quite a bit less.

Admittedly, this is a lazy test of Hamilton's claim, but at least his story does not leap out of data. I remain sympathetic to his skepticism, but I'm not convinced he's right.

Since I bought a Northern Virginia house in 2000, though, I sure hope he is.

But that gets me thinking. What would I actually do if I knew for sure that my house was going to plummet in value one year from today? My ideal solution would be to sell my house to someone, rent it from them for a year, then buy it back. But that would be very hard to arrange. In practice, I'd have to sell, rent whatever's available for a year, then use my nest egg to buy a comparable (or better home), pocketing the difference.

There's a lot of transactions costs built in there. For starters, there's moving costs x2, plus all the pain and suffering of changing my address and phone number twice, plus the loss of sentimental value in my current house. And don't forget opportunity costs - I'd say that 100 hours each for me and my wife is a conservative estimate.

So how much money would I have to net to make me sell, rent, and buy again after the crash? Frankly, it would take $200,000 just to pique my interest. And that's with certainty. Maybe I'm unusually averse to moving, but I can easily see people with kids in school being even less mobile than I am.

This hardly proves there's a bubble, but it does make me doubt that speculation would stop a bubble before it got started.


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COMMENTS (4 to date)
citysurfernyc writes:

This is very back-of-the-napkin, BUT:

The average cost of a condo on the island of manhattan right now is $592,945 for a 1-bedroom and $1,409,539 for a 2-bedroom (No Joke, source: http://www.elliman.com/MainSite/MarketReports/)

Among other ridiculous and wasteful stealth taxes here, there is a 1.875% "mortage recording tax here" for the buyer. (See estimation of fees at the bottom of this message)

As buyer, say you pay 1 point on your mortage, that's (roughly) $58,000 in costs/fees to close on the 1 bedroom plus $120,000 down (20% down is mandatory to get a mortgage in this market), or about $180,000 CASH need up-front. For a two bedroom, that's $130,000 in costs/fees, and $280,000 down, meaning you need about $410,000 cash handy.

On top of that, the SELLER's costs/fees (including commission) are about $50,000 on the 1 bedroom and $110,000 on the 2 bedroom.

To sell your average 2 bedroom condo in manhattan (costs/fees=$110,000), rent for one year (say you get a deal and pay $3,500/month), and repurchase it one year later (costs/fees=$130,000) would squander about $275,000, roughly the same cost as taking a 20% hit to principal in a market decline.

Let's just say it would take substantially more than $200,000 to make this plan worthwhile. Buying/selling in manhattan is a major HASSLE too, don't even get me started on buying a co-op here!


source: http://www.manhattanliving.com/closing_costs.cfm

CLOSING COSTS:

Condominium Apartments and Townhouses

For the Seller:
Attorney - $1600+
NYC RPT Tax - 1% of purchase price if $500,000 or less; 1.425% if over $500,000
NYS Transfer Tax - $4.00 per $1000 of purchase price
UCC-3 Filing - $75.00+
Payoff Bank Fees (if applicable) - $300+
Managing Agent Fee - $500-$750
Move Out Deposit - $500-$1000 (typically refundable if no damage)
Broker Commission - 6% of purchase price

For the Purchaser:
Attorney - $1,600 +
Managing Agent Application Fee - $250-$750
Credit Report Fee - $50-$100 per applicant
Lead Based Paint Disclosure Fee - $0-$50
Mansion Tax - 1% of purchase price if purchase price is $1,000,000+
Move-in Deposit - $500-$1,000 (usually refundable if no damage)

Mortgage Associated Fees:
Origination Costs – points 0-3% value of loan
Application, Credit Check, Processing - $500+
Appraisal - $275+
Bank Attorney - $500+
UCC-1 Filing Fee - $50+
Mortgage Recording Tax - 1.75% of mortgage for up to $500,000; over $500,000 is 1.875% of mortgage
Title Insurance, Title Search & Recording Fees - up to 0.5% of purchase
Building Searches - $200-$400
Recording Charge - $17 per document plus $5 per page

For Purchases Directly from Sponsor or New Construction:
NYC RPT Tax - 1% of purchase price up to $500,000; 1.425% of purchase price over $500,000
NYS Transfer Tax - $4 per $1,000 of purchase price

===------------------------------

Co-operative Apartments:

For the Seller
Attorney - $1,600+
Stock Transfer Stamps - $.05 per share
NYC RPT Tax - 1% of purchase price if $500,000 or less; 1.425% if over $500,000
NYS Transfer Tax $4 per $1,000 of purchase price
UCC-3 Filing - $75+
Flip Tax (determined by the coop)
Payoff Bank Fees (if applicable) $300+
Managing Agent Fee - $500-$750
Move-Out Deposit - $500-$1,000 (typically refundable if no damage)
Broker Comission - 6% of purchase price
Estate Fees - Coop may impose additional fees for estate sales
Lost Stock and Lease Fees - $250-$750

For The Purchaser
Attorney $1,600+
Managing Agent Application Fee - $250-$750
Credit Report Fee - $50-$100 per applicant
Lead Based Paint Disclosure Fee - $0-$50
Mansion Tax - 1% of purchase price if purchase price is $1,000,000+
Move-in Deposit $500-$1,000 (usually refundable if no damage)

Mortgage Associated Fees:
Origination Costs – points 0-3% value of loan
Application, Credit Check, Processing - $500+
Appraisal - $275+
Bank Attorney - $500+
UCC-1 Filing Fee - $50+
Recognition Agreement Fee - $200+
Lien Search - $250-$350

Nathan Whitehead writes:

What would I actually do if I knew for sure that my house was going to plummet in value one year from today?

One thing you could do is short REITs. A potential problem: the REIT might not specialize enough to match the fluctuations in value of your house in particular.

Mr. Econotarian writes:

Your NoVA house hasn't gone up in value $200,000 since 2000?

Jon writes:

Even though I am a homeowner, I hope it is really a bubble; otherwise it means that the next generation will have to earn more to maintain the same standard of living.

Home prices are ommitted from the CPI produced by the government; they are only indirectly included via some "equivalent rent calculation" which substitutes market rental rates for home prices.

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