I was reading an article in the New York Times (free registration required to read) this morning about how the housing market is crashing not just in the U.S. but all over the world. And I was thinking, “Well, that makes the U.S. look a little less dumb in comparison to everyone else.” But it also means that investors and marketers all over the world have managed to overlook a basic fact about housing economics: If someone in an equivalent job to yours can’t buy in your neighborhood today, your neighborhood is overpriced and due for a “correction.”

Sure, it feels good to know that the house you bought back in 1998 for $180,000 is now “worth” $400,000. But if you are a middle-class worker — a marketing person or engineer, for example — and your salary hasn’t gone up enough since 1998 that you could afford to spend $400,000 for a house today, what makes you think that other people like you can afford that much?

Answer: they can’t.

For a few years we had a huge house price run-up — not just in the U.S. but also in Europe, India, urban China, and many other places — with most buyers motivated by fear that if they didn’t buy now, they’d never be able to buy because prices were going up, up, up.

I believe this fear was the motivation for many people who took out silly interest-only or adjustable-rate mortgages. Their thinking was similar to the thinking of people in hyper-inflationary economies who hoard flour or rice or any other tangible good based on the justifiable fear that overpriced though a loaf of bread might be today, tomorrow it would be even more overpriced so you had better buy it now since tomorrow you would only be able to afford half a loaf.

And real estate is a safe, sure investment, right? “They ain’t making no more of it” is a line often used to justify huge increases in land prices. Except that this is not exactly true. Here in Florida, “They” are making lots more land every year — in the sense of land used for housing — by tearing out farmland and replacing it with streets, utilities, and “Buy Your New Deluxe McMansion Today” billboards.

Except at some point we run out of people who can afford $400,000 or $800,000 high-ceiling houses with granite countertops, even as we have plenty of people who can afford something like a Katrina Cottage, none of which are being built in or near Bradenton, Florida, where I live.

One local builder here, Neal Communities, has started building a few houses in the $125,000 - $150,000 range, down from the typical Neal $500,000+ offering. Guess what? Their low-priced models are selling like mad.

There’s a lesson here, not just for U.S. homebuilders, real estate investors, and buyers, but for their equivalents all over the world.

I’ll leave it to you to figure out what that lesson is.

This entry was posted on Monday, April 14th, 2008 at 7:57 am and is filed under Bradenton/local, Business. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.