A Bubble Bursts
As you know, I work in school trust lands, and so a lot of what I do has to do with Utah real estate development- joint ventures with Ivory Homes, that kind of thing. I have been working through some projections and historical data, as this whole housing crisis seems to finally be arriving here, and some of it was kind of interesting.
Between 1963 and 2004, the median price of a home has risen by 6.6% per year. That means that the average home price doubles every 11 years.
But, keep in mind, that doesn’t mean that a given house, if you follow it for decades, appreciates so rapidly. What happens is that builders add to the top end almost exclusively, they have built newer, bigger, better homes for decades now, and as more and more of those are built, it stretches the median price up. The ordinary house in the ordinary city, say an average home in Murray, Utah, built in 1960, for example; it hasn’t appreciated as much, it probably has risen 3 or 4% a year, doubling maybe every 25 years- maybe almost keeping up with inflation. Something that was mid to high end in 1995 is not mid to high end anymore by a long shot.
Utah real estate has tended to be at or above the national average, but 2 years behind on trends. So, for example, when my parents bought a house in Utah in 1996, the nationwide median home sale price that year was $115,800. In Utah, the median that year was also $115.
By 1998, the national average was $128K, but in Utah it was $150K.
Around the time I finished at Westminster, Utah was in a real economic slump, and prices here- median $175- were below the national- median $185. In 2005, Utah’s median was down to $173- and the national median was up to $219.
Then Utah real estate shot up, to a median of $232 in 2007, above the national average of $217.
The real estate bubble has burst pretty bad the last couple years. Sacramento has taken it worse than anywhere else in the nation, down 40% in 2 years. Ouch! I have family there, and that is awful. Sacramento’s median was $356K in the 2nd quarter of 2007, and it was $229K in the 2nd quarter of 2008. In other words, a hypothetical person who bought for $400K in Sacramento 2 years ago, or who could’ve got an appraisal of $400K 2 years ago, their house is now worth $240K. 2/3 of Sacramento home sales are foreclosures right now.
For most of the country, housing is down 20% in 2 years. Texas has pretty much been immune, because Texas real estate is practically free to begin with, which is why I decided it was a better place to do law school than LA (down from $593K to $417K, wow, in case you are wondering).
This is going to be coming to the Salt Lake Valley, maybe as bad as Sacramento. The first sign was the insane climb it made in 2 or 3 years there. The second sign was the fact that there are zillions of $300-$500K houses, nothing but brand new 3000-5000 square foot things, all over the place- in this state of low wages, an average household income of $53,000, lots of kids, and tithing. Then, the 3rd sign, this Summer, was for sale signs on about 2/3 of the houses in the state- with absurd asking prices. The 4th sign was that none of them sold.
For the next 2 years, if anyone actually wants to sell their house, they will have to start lowering prices, fairly dramatically.
Between 1963 and 2004, the median price of a home has risen by 6.6% per year. That means that the average home price doubles every 11 years.
But, keep in mind, that doesn’t mean that a given house, if you follow it for decades, appreciates so rapidly. What happens is that builders add to the top end almost exclusively, they have built newer, bigger, better homes for decades now, and as more and more of those are built, it stretches the median price up. The ordinary house in the ordinary city, say an average home in Murray, Utah, built in 1960, for example; it hasn’t appreciated as much, it probably has risen 3 or 4% a year, doubling maybe every 25 years- maybe almost keeping up with inflation. Something that was mid to high end in 1995 is not mid to high end anymore by a long shot.
Utah real estate has tended to be at or above the national average, but 2 years behind on trends. So, for example, when my parents bought a house in Utah in 1996, the nationwide median home sale price that year was $115,800. In Utah, the median that year was also $115.
By 1998, the national average was $128K, but in Utah it was $150K.
Around the time I finished at Westminster, Utah was in a real economic slump, and prices here- median $175- were below the national- median $185. In 2005, Utah’s median was down to $173- and the national median was up to $219.
Then Utah real estate shot up, to a median of $232 in 2007, above the national average of $217.
The real estate bubble has burst pretty bad the last couple years. Sacramento has taken it worse than anywhere else in the nation, down 40% in 2 years. Ouch! I have family there, and that is awful. Sacramento’s median was $356K in the 2nd quarter of 2007, and it was $229K in the 2nd quarter of 2008. In other words, a hypothetical person who bought for $400K in Sacramento 2 years ago, or who could’ve got an appraisal of $400K 2 years ago, their house is now worth $240K. 2/3 of Sacramento home sales are foreclosures right now.
For most of the country, housing is down 20% in 2 years. Texas has pretty much been immune, because Texas real estate is practically free to begin with, which is why I decided it was a better place to do law school than LA (down from $593K to $417K, wow, in case you are wondering).
This is going to be coming to the Salt Lake Valley, maybe as bad as Sacramento. The first sign was the insane climb it made in 2 or 3 years there. The second sign was the fact that there are zillions of $300-$500K houses, nothing but brand new 3000-5000 square foot things, all over the place- in this state of low wages, an average household income of $53,000, lots of kids, and tithing. Then, the 3rd sign, this Summer, was for sale signs on about 2/3 of the houses in the state- with absurd asking prices. The 4th sign was that none of them sold.
For the next 2 years, if anyone actually wants to sell their house, they will have to start lowering prices, fairly dramatically.
And consider this- houses aren't going to be an average of 7000 square feet in 2042. The marginal utility of square footage starts dramatically falling at a given point- depending on family size I'd bet. For 2-4 people, maybe it is 2500 square feet. For 6-9 people, maybe it is 3500 or 4000 square feet.
I think residential real estate as an investment is vastly overrated. People should buy houses if they want for stability, for retirement savings, for the tax benefits that the government has no business giving, because they like to play Bob the Builder on it, etc. They should not be bought as investments.
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