The Housing (and EeeeeVeee) Bubble

Guest Post by Eric Peters

Houses in my area – a rural county in SW Virginia – didn’t used to cost so much that most who live here couldn’t afford to buy one.

They do now.

Here is an example. This small house –  it is only about 1,100 square feet – just went on the market for just shy of $300,000. It would cost (according to the estimate that runs with the ad) some $2,100 per month to live in this house, assuming you could afford to put 20 percent – just shy of $60,000 – down. Plus just shy of $12,000 on top of that for closing costs – for a grand total of just over $70,000 due on the day you get the keys.

The average individual living in the area earns just shy of $26,000 annually. Family income (dual earner) is just shy of $46,000. Very few individuals or families who live here can afford such a house.

The usual lending standard defining “affordability” is the 4-1 ratio of income to home cost. Thus, a family with a $46k annual income could handle the payments (including the down payment) on a home that cost about $184,000.

There are fewer and fewer homes available for that amount of money in my area. The question arises: Who is buying these $300k-plus homes, then?

The answer seems to be twofold.

The first is people who do not live here. They are people who live in areas such as Northern Virginia – were a $300k home is usually a townhouse. A shabby townhouse. Up there, a $300k single family house such as the one for sale down here would be like getting a house for free.

Or at least, half price.

And that is why so many of them come down here to buy one.

They are mostly government employees and people whose work is with the government who live in the distorted world of government, which pays people much more than they are worth in the free market because the government can pay them irrespective of what they are worth – because it has the power to make the rest of us pay them what they think they are worth. That is nice work.

Such a person sells their $300k townhouse – or their $600k single family house – and it is no trouble at all to buy a $300k house down here. Especially if they are still being paid a Northern Virginia government worker’s income – which they can still collect by working from their new home.

But it is not just that – as even the homes for sale in Northern Virginia are no longer affordable for many who work there, including even government workers. I can speak to this personally, because I used to live there – in a small house an hour’s drive away from downtown DC, built on a slab, with single pane windows and T-111 siding on a tiny lot in a working class ’70s-era subdivision. I bought it for $150k back in the late-’90s. Adjusted for inflation, that $150k is equivalent to what about $300k would buy today.

But you can’t buy my old house in Northern Virginia for that amount of money today.

According to Zillow, it would list for more than twice that – $614,730 – if it were put on the market today. That’s a hard swallow even on a government worker’s income – especially given what it now costs to finance a home. Interest rates are more than twice what they were just a year ago.

Then there is the second thing.

Speculative institutional investment. The buying up of homes for the purpose of driving up the cost of homes – and making a lot of money by selling (and renting) them.

But the fly in that soup is there must be people who can buy (and afford to rent) them – and these appear to be running out. Houses aren’t selling as swiftly all of a sudden – here or up there.

This ought not to be surprising.

In order for someone to be in a position, financially, to buy that $300k house in my area that few who live in this area can afford to buy, someone in Northern Virginia (or similar) must first sell their $600k house to someone who wants to live up there. And that’s the other fly in the soup- i.e., people are not wanting to live up there (which is why they are moving here – and to places like here) because who wants to spend $600k to live in a small, nothing-special tract house in what was a working class subdivision in Northern Virginia. where traffic is abominable and everything seems to teetering on the edge of Third World-ism, no matter how much money you have to spend.

$600k would have bought an estate home twice the size of my old house – custom built, on several acres of land in a high-end area of Northern Virginia such as Fairfax County – back when I bought my old house. Now it buys my old house, on a postage stamp-sized lot, in farther-out Loudon County.

If current trends continue, it will soon take a million to buy my old house.

This will drive most people – especially young people – out of houses by assuring very few of them (even those who work for the government) will ever be able buy one. It is not unlike the unfolding EeeeeeeeVeeeeee debacle that has pushed the average price paid for a new vehicle to $50,000.

To put that in some context, back in 1980, a Cadillac Sedan deVille – which was one of the most expensive (and largest) new luxury cars you could buy that year – listed for $13,282. That is equivalent to – here it comes! – about $50,000 today. In other words, the average price paid this year for a new car is equivalent to the cost of what people – who could afford it – were spending on a top-of-the-line Cadillac back in 1980.

Not many people were driving Cadillacs back in 1980.

How many people will be driving an EeeeeeeeeVeeeeee in 2030? Probably about as many who will be living in a single family home.

That is to say, not many.

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