In real estate it is all about location, location, location. Two very different real estate markets are Cleveland and Chicago. Based on my very unreliable and unscientific survey of the two markets it appears that the same house that would ask for 180 grand in a prime suburb of Cleveland would ask for a half a million dollars in a prime suburb of Chicago.
Of course there are many reasons why real estate should fetch higher values in Chicago. The Chicagoland area's population has been rising while Cuyahoga Counties population has been falling, and Chicago's economy is quite a bit healthier than Clevelands.
Still if Chicago's real estate market were to crash, the Chicago area purchase would take a much greater loss than a purchase in Cuyahoga County. If the half million dollar house took a 200 grand loss, the Cleveland purchase would have to go negative 20 grand to equal the loss. No matter how bad the real estate market gets I doubt very much if people will ever pay other people 20 grand to take their house.
Perhaps it makes sense to buy a house in Cleveland whereas in Chicago it might be a good idea to wait a bit.
In the spring of 2003 I purchased a very excellent book by John R. Talbott entitled THE COMING CRASH OF THE HOUSING MARKET. This book basically lays out the economic events of 2008 five years early. The material the author presents on the possible demise of Fannie Mae and Freddie Mac are by itself masterful and incredibly prescient. Apparently nobody in government listened to this man as they were more concerned with gaining the huge political donations emenating from these two mortgage behemoths. The corporate media basically ignored this book and the very same politicians that ran our economy into the iceberg full speed ahead are still running our economy.
The basic premise of this book is that the housing market is not a free market. People can purchase a three hundred thousand dollar house for a 5% or $15,000 down payment. The upside being that the price of the house could double or triple for a huge capital gain. The downside is losing the 15 grand and whatever other assets the bank can get their hands on which in many cases is not much. With this lopsided risk reward ratio people take on as much risk as they are allowed.
Highly leveraged homeowners are playing with other people's money and therefore are willing to take "option-like" risks.
THE COMING CRASH OF THE HOUSING MARKET APRIL 2003
A few lenders in the housing market control the majority of the capital and their very similar qualifying formulas determine prices homeowners will pay for their houses.
THE COMING CRASH OF THE HOUSING MARKET APRIL 2003
Banks are not motivated to control risk in their mortgage lending as they get paid very large fees for these types of transactions, have principal-agent problems with their own employees, and do not hold many of these mortgages on their books, but rather pass them through to quasi-agencies and long term investors.
THE COMING CRASH OF THE HOUSING MARKET APRIL 2003
Self policing of risk in the mortgage industry has all but disappeared.
THE COMING CRASH OF THE HOUSING MARKET APRIL 2003
In the spring of 2003 Talbott presented overwhelming evidence that housing was dangerously overpriced. Again accordingly to my own very unreliable and unscientific survey asking prices for houses in Chicagoland are significantly higher in 2009 than they were in 2003. Based on this evidence housing in Chicago is still dangerously overpriced.
Now that the housing bubble has burst and the economic disaster predicted by Talbott six years ago is upon us, the government has resorted to a 700 billion dollar handout to the Wall Street fat cat bankers to help stem their losses. Further the very same politicians that ignored the impending housing crash six years ago now want to run the money printing presses full bore in a vain effort to buoy housing prices.
The price of housing is too high in relation to the prices of everything else. If it costs three hundred thousand dollars to buy a house this means it costs a hundred thousand $3 loaves of bread, 7300 $41 barrels of oil, twenty seven thousand $11 ounces of silver or 353 $850 ounces of gold. If a house is overpriced in terms of loaves of bread, how can the government maintain the inflated price of the house without inflating the cost of the bread? In a free market this is impossible. The government can only maintain the price of housing by creating an artificial market.
The government's 700 billion dollar bailout, the treasury purchasing mortgage backed securities and all the other misguided attempts to reinflate the housing bubble are creating an artificial market for housing and housing debt. We cannot have a healthy economy or a healthy housing market in this country until we have a real market. How can anyone know what a house is worth without a real market?
As long as the government maintains an artificial housing market buying a house in this country remains a very dicey proposition.