The Housing Bubble is Real
and is Coming Soon to Your Part of the Country
Edward J. Dodson
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 dysfunction 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
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.