In a column in August, I reported that almost every large news magazine and major newspaper was predicting the real estate bubble was about to pop. I concluded that, when the major financial press all agree an event is eminent, that is the best guarantee it probably isn’t.
As I pointed out at that time, I don’t remember reading screaming headlines in 1999 or 2000 about the coming dot.com bubble. My experience is that the financial press does not have a great record of calling market tops.
I suggested that, rather than a crash, a soft landing might be a more likely fate for the real estate markets. This would be similar to what has happened in Australia, where prices have gone flat or fallen slightly.
I have recently come across some additional information that seems to support those conclusions. It possibly even calls into question whether there is a real estate bubble at all. This is from the November issue of Wired magazine, supported by statistics from the National Association of Home Builders, the National Bureau of Economic Research, the US Bureau of Labor Statistics, and the US Census Bureau.
If we compare housing statistics in 1950 with those of today, we find that housing is not overpriced at all. Adjusted for inflation, housing cost $60.61 per square foot in 1950. Today, the cost is $59.49 per square foot. In 1950, the average home cost 229% of a family’s annual income. Today the cost is 251% of a family’s annual income.
Certainly, the average cost of a house has increased. In 1950 (adjusted for inflation) the average house cost $59,575, and today the average home costs $138,601. However, the average home in 1950 had two bedrooms, one bath, a one-car garage, and 983 square feet. Today, the average home has three bedrooms, two baths, a fireplace, central air, a two-car garage and 2,330 square feet. In 1950 , the average person lived in 289 square feet of space. Today, with the decrease in family size and the increase in the size of houses, it is 896 square feet per person.
Over the past 55 years, while housing prices have increased 133%, the average square footage of a home has increased almost proportionately by 137%. The average income has increased 113%, indicating that housing costs have increased slightly. Still, they have not gone out of sight, as many of us might be led to believe.
Another interesting—and to me, quite startling—fact in light of the current soaring energy costs is that we are paying less today for heating costs than we did in 1950. Again adjusted for inflation, the annual heating cost in 1950 was $3,419. Today (as of September 2005) the cost is $2,644. The percent of annual income that heating costs represent was 13% in 1950 versus 5% today.
If there really isn’t a real-estate bubble, is that good news or bad news? Obviously, the answer depends on your individual circumstances. It may be good news if you will be selling a house in the near future. If you are trying to decide whether to buy a house, this may be either good or bad news. If prices aren’t likely to come down, there is less chance that housing will become more affordable. At the same time, if you do buy a house you can be more confident that it is likely to maintain its value.
The bottom line is that, bubble or not, it’s probably wisest to base housing decisions more on what fits your particular situation and less on predictions or worries about the real-estate market.