Is the Real Estate Market a House of Cards?
The upswing in housing prices may increase consumer spending by homeowners who believe increases in the prices of their homes has made them richer.
In 2005, prices for homes climbed to dizzying new heights. Does this trend in prices represent a bubble? Will the bubble burst? Are these higher prices sustainable? What will be the economic impact?
During 2005, the housing market has been a frequent news topic. Why all the interest? First, the price of housing, particularly in some "hot" areas of the country, has seen annual double digit growth over the last five years?up to 50 percent per year in Las Vegas! Second, the housing affordability index has been dropping. This index is a measurement of those who can qualify for a mortgage on a median priced house given current interest rates, a 20 percent down payment, and the median income in the area. For example, the average cost of a house in California as of November 2005 was $545,910, and the median salary was $54,140?less than half the salary needed to qualify for a mortgage. In Southern California the gap was even bigger. The median salary of $52,580 was $74,240 below the salary needed to qualify for the median priced house.[1] These figures indicate that less than 14 percent of households can purchase the median priced house?down from 18 percent a year earlier. As housing prices increased and the affordability index fell, market participants began to question whether the high prices could be sustained or if a housing price bubble existed.
Why Should Businesses Care?
If there is a housing price bubble and it does burst, why should business people care?other than be concerned about a drop in the value of their own homes? The econo ...