But the doomsayers, Lereah says, are mistaken in their dire predictions. Their big mistake, he says, is basing their forecasts by comparing housing appreciation with income growth. Instead, he says, they should look at the percentage of mortgage debt as it relates to income.Lereah says it would take a "perfect storm" to swamp the real estate industry. There would have to be a slumping economy, job losses, a large inventory and a significant increase in interest rates to create that storm. The closest and most recent example of that occurring, he says, is Boston, which lost 15 percent of its labor force in 1990 and '91.
He sees no such storm gathering in the distance. Instead, he sees a slight contraction in the real estate balloon throughout 2006 and a healthy expansion in 2007.
And that, he says, is more important than most people realize."The only way to build wealth, for 80 percent of Americans, is real estate. If the balloon bursts, then 80 percent of Americans will have trouble with retirement."
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Lereah's argument that we should focus more on debt payments in relation to housing growth as opposed to income has merit...if you have bought and sold properties before. However, for first-time home buyers, income is EVERYTHING. You need your income to build up savings for a down payment. You need your income to finance the debt mortgage payments.
ReplyDeleteReal estate is the last line of defense against monetary stagnation. Stocks have hit the crapper since 2001. The returns are no where near the late 1990s boom.
Income growth is stagnant for 4/5 of the entire US working population. Workers are not getting big raises even though companies are raking healthy profits.
This nation's economy is in deep shit if the residential real estate market tumbles.
A friend of mine went to an open house in D.C. yesterday. The one-bedroom, in a nice neighborhood, was purchased a year ago for $50K less. The place had been on the market, then off again, and now back on again. My friend was casually chatting with the listing agent, when an "investor" from the 'burbs barged in and wanted to buy the place, and maybe one or two other properties and proceeded to divulge lots of information about his financial situation. The investor then asked the agent how much the place could rent for, and the agent gave him a price way out of line for the size of the apartment, even if it is in a neighborhood. As if you would trust the listing agent's recommendation! Of course they are going to tell you that rents are in line with the asking price. Don't these "investors" do their own investigations anymore? The crash can't come soon enough.
ReplyDeleteI meant to say "even if it is in a nice neighborhood."
ReplyDeleteHis argument about debt payments seems off - hasn't it been out there that some Americans are paying 50% or more of their income to their mortgage debt? Is that ok by Lereah? God I can't stand him.
ReplyDeleteMr. Lereah is paid for by the NAR. IMHO he is akin to Mary Meeker and Henry Blodget telling people to buy the dot.coms.
ReplyDeleteAccording to Lereah, is there ever a time NOT to buy, but rent? I haven't seen him say that.