The Housing Bubble is Real
and is Coming Soon to Your Part of the Country
Edward J. Dodson
[Reprinted from
GroundSwell, January-February, 2006]
One of the most significant changes occurring across the United
States is the disappearance of significant regional differences in the
cost of living. GroundSwell readers understand that rising
land prices put the squeeze on business profits and claim an
ever-greater proportion of the gross incomes of those of us who
receive wages in exchange for our labor. High land costs in virtually
every metropolitan region of the country reduce the opportunity for
many businesses to relocate production facilities in order to regain
satisfactory profit margins. When companies close a U.S. facility
today, the former employees no longer have the option to relocate to
the new "boom" region in search of employment.
Despite the financial stresses experienced by millions of U.S.
families, land markets have continued their upward spiral. Builders
and banks have responded by repeating past behavior. A recent analysis
of the housing market issued by Merrill Lynch & Co. reports that
more than two million new homes are under construction - at a time
when the opportunity for young adults to establish independent
households is greatly reduced by the high cost of rental housing.
Saving toward the purchase of a home is simply out of the question for
many families raising young children.
In a recent article in the Philadelphia Inquirer, economist Mark
Zandi forecast the coming burst: "House prices are at the
mountaintop. All roads lead down. It's just a question of how steeply."
At the same time, the National Association of Realtors - looking ahead
just one year - expects another record-setting year in real estate
sales.
Who are purchasing all of these homes? No surprise, the market is
driven by high income households. In fact, over one-third of all homes
purchased during 2005 have been "second homes" - properties
located in resort communities, either in the United States or in other
countries. Another segment of the market is middle-income retirees. As
prices of housing in Florida and other traditional retirement
destinations skyrockets, Mexico is turning into a growing second home
and retirement market for U.S. citizens. This happy circumstance is
threatened, of course, by the demand-driven land speculation in these
newer markets.
What we are seeing in many parts of the world is the creation of new "communities"
of absentee owners who take up residence in their properties for only
a few weeks or months each year. A large proportion of these
properties are not even offered for lease when not being used. The
owners have no need to generate revenue from leasing the property.
Existing communities in highly desirable locations are also undergoing
dramatic transformations, with long-term owners "cashing out"
to buyers who demolish existing homes in order to construct their
dream second home on prime parcels of land facing an ocean, lake or
river. Few have stopped to ask what will happen to our communities
when land prices make it impossible for any but the very well-to-do to
live there. Who will work for the public sector to construct and
maintain infrastructure? Who will fill service-sector jobs in hotels,
retail stores and restaurants?
The stresses caused by a dysfunctional land market and the private
appropriation of land values is readily apparent in New Jersey, where
I reside. The Philadelphia Inquirer recently looked at the
problem, reporting that in the towns that dot the coast of the
Atlantic Ocean beginning just south of Metropolitan New York City, the
price of houses has doubled and even tripled in less than seven years.
The median price of housing in many of these communities now exceed
$500,000. Not unsurprisingly, the number of year-round residents
living in these communities is falling rapidly as young adults and
families with children move away in search of affordable housing.
Not only young adults are affected, of course. Rising property taxes
are causing older, longer-term residents and second home owners to
sell. While many of us will have a difficult time feeling sympathy for
people who are able to pocket several hundred thousand dollars of
unearned gain on the sale of these properties, the greater societal
impact should not - cannot - be ignored.
The most desired locations on the planet are on a path to become the
exclusive province of the top one two percent of the world's
population, set aside as gated communities only occasionally occupied
and maintained by bused-in workers.
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