Sunday, February 7, 2021

The real estate bubble: Think of your home as a shelter, not an investment

 Real estate in my little corner of Flyover Country is "on a hot streak." In Baton Rouge, housing sales rose 12 percent last year, and prices shot up by 7 percent. 

Everywhere, Baton Rouge builders are scrambling to meet the demand for new houses, new condos, new apartments.  Thousands of apartment buildings are under construction in the Mississippi River floodplain, where land is relatively cheap; and new subdivisions of starter homes are springing up like dandelions.

Everyone is jumping into the housing market. And why not? Interest rates on a 30-year loan are below 3 percent! You'd be crazy not to buy a new home or snap up some rental housing as an investment.

But wait a minute. Louisiana actually lost population last year. So who is going to buy the new starter homes down by the River levee? Who is going to rent all those new apartments?

And when we take a closer look at the real estate boom in my hometown, it begins to look a little less rosy. In the zip codes that border the Mississippi River, home prices actually went down. 

If we take a deep breath and search for reality, we see that real estate across the U.S. is in a bubble--very much like the bubble that led to the home-mortgage crisis in 2008-2009.  Artificially low interest rates have juiced home sales in some parts of the country, but real estate languishes in the nation's urban centers.

Houston, for example, has a magnificent skyline, but a lot of skyscrapers have empty space. Houston's office-vacancy rate was 24 percent last year. According to Bloomberg, business tenants vacated a net 3.2 million square feet of Houston properties in 2020. Meanwhile, 3.1 million square feet of "new top-tier space [is] set to be completed over the next 18 months."

Downtown Houston has thousands of townhomes and condominiums occupied by people who work in Houston's office towers. But people are working at home these days. Many businesses have concluded that they don't need to cram their employees into skyscrapers.  Folks can work from home.

And if you work from home, you don't need to live in a crowded city. You don't need to pay sky-high property taxes. You don't need to send your kids to crummy schools.  Suddenly, the suburbs are looking better and better.  Maybe it wouldn't be so bad living next door to Ozzie and Harriet.

Housing prices are up because interest rates are at a historic low. But interest rates won't remain low forever. Builders are constructing cookie-cutter housing projects at a dizzying pace, but it is not clear who will live in these new homes.

Now is not the time to speculate in real estate.  Now is a good time to stop thinking of your home as an investment and begin thinking about it as shelter for your family. 

Ozzie and Harriet's home: Did Ricky mow the lawn?

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