In California, it is now fashionable to talk about a housing crisis, while ignoring the environmental restrictions that created it. Strip away the word “crisis,” and what is left is the truth. What we have is a man-made shortage, not a crisis.
The shortage of new homes is the fundamental factor driving prices higher and higher, not interest rates, high or low.
Make no mistake, interest rates matter — but not as much as a new family willing to commute 100 miles a day just to find an affordable house. And not as much as NIMBYs determined to stop new construction, new roads and new schools for whatever reason they can make up at the time.
For those still talking about a bubble, let them come to Murrieta, CA. Two years ago, my company opened an affordable condo project that sold faster than we could build it. Today, these same units, after experiencing a 30% annual increase in value, disappear in hours when they are put up for resale.
It’s not the interest rates that are causing this almost desperate hunt for new, especially first, homes. It’s the shortage. Almost every housing market in America has seen the crushing aftershocks of these environmental “victories.”
Many of these areas have also seen a healthy increase in prices. We are seeing lots of reasons why, all supporting the same irrefutable fundamental: anywhere we stop building homes, prices will rise.
Federal Reserve Board Chairman Alan Greenspan recognized the long-term stability of housing prices when he said recently that, “It is worth bearing in mind that any sustained increase in rates presumably would occur only in the context of a more vigorous upturn in the pace of business activity, suggesting that the net effect on housing might be relatively limited.”
He went on to say that, “Clearly, after their substantial run-up in recent years, home prices could recede. A sharp decline, the consequence of a bursting bubble, however, seems most unlikely.”
Houses are not pork bellies or tulips. People buy them — and hold on to them — because they need them. The overwhelming majority of home buyers are not speculators or even investors. They just want a place to live.
That doesn’t change because interest rates might tick up, or environmentalists discover a new species of rat. Long before any bursting bubble, we will see more rental vacancies, housing taking longer to sell, foreclosures staying on the resale market longer; and other indications of economic anemia. We are not seeing even a hint of these indicators today.
The housing market will not stay the same forever. At some point, the demand for multi-million dollar estate homes on lots with a view may diminish.
But for every couple seeking that kind of high-end trophy home, thousands of young couples with children in strollers patrol our models every weekend looking for their first home and their first stop on the ladder of homeownership. These people are not going to disappear like some bubble. Their desire for a new home, their first home, and their willingness to do anything to get it, are just about as real and solid and lasting as a rock.
And rocks don’t burst.
Michael “Mick” Pattinson is president of Barratt American in Carlsbad, CA.