The Big Bubble
Recently a 400-acre farm in my neighborhood in Virginia was sold. The farm was divided into numerous tracts and put on the auction block after the owner had passed away. You should have seen the new large pickups, BMWs and Hummers arriving about an hour before the sale. The gold rush in real estate is alive and well.
The worldwide rise in real estate and particularly house prices is the mother of all bubbles and is the largest in history. Housing prices value in developed countries has doubled in the past five years, an increase equivalent to 100% of these countries’ GDP. In the 1990s the global stock market bubble was 80% of GDP, compared to 55% GDP in the roaring 20s.
The current boom is being driven by low interest rates and the loss of strong returns in the stock markets, which increases faith in alternative investments.
Declines in housing prices are now starting to occur in Australia and Britain. At the banking schools this summer I have said that America can expect a softening of the red-hot real estate market in 12 to 18 months. Values would have to decline 35% nationwide before they would equal the capitalized returns from rents.
In California, over 60% of new mortgages are interest-only or negative amortization loans, compared to 8% in 2002.
Adjustable rate mortgages have increased to 50% in states with the largest increases in home prices.
25% of all purchases of homes and 42% of new homebuyers are making no down payment.
Does this remind you old timers of agricultural land values in the 1970s before the correction of the 1980s?
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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