The Housing Bubble is Real
and is Coming Soon to Your Part of the Country

Edward J. Dodson

[ GroundSwell, January-February 2006]

One of the most significant changes occurring across the United States is the disappearance of significant regional differences in the cost of living. GroundSwell readers understand that rising land prices put the squeeze on business profits and claim an ever-greater proportion of the gross incomes of those of us who receive wages in exchange for our labor. High land costs in virtually every metropolitan region of the country reduce the opportunity for many businesses to relocate production facilities in order to regain satisfactory profit margins. When companies close a U.S. facility today, the former employees no longer have the option to relocate to the new "boom" region in search of employment.

Despite the financial stresses experienced by millions of U.S. families, land markets have continued their upward spiral. Builders and banks have responded by repeating past behavior. A recent analysis of the housing market issued by Merrill Lynch & Co. reports that more than two million new homes are under construction -- at a time when the opportunity for young adults to establish independent households is greatly reduced by the high cost of rental housing. Saving toward the purchase of a home is simply out of the question for many families raising young children.

In a recent article in the Philadelphia Inquirer, economist Mark Zandi forecast the coming burst: "House prices are at the mountaintop. All roads lead down. It's just a question of how steeply." At the same time, the National Association of Realtors -- looking ahead just one year -- expects another record-setting year in real estate sales.

Who are purchasing all of these homes? No surprise, the market is driven by high income households. In fact, over one-third of all homes purchased during 2005 have been "second homes" -- properties located in resort communities, either in the United States or in other countries. Another segment of the market is middle-income retirees. As prices of housing in Florida and other traditional retirement destinations skyrockets, Mexico is turning into a growing second home and retirement market for U.S. citizens. This happy circumstance is threatened, of course, by the demand-driven land speculation in these newer markets.

What we are seeing in many parts of the world is the creation of new "communities" of absentee owners who take up residence in their properties for only a few weeks or months each year. A large proportion of these properties are not even offered for lease when not being used. The owners have no need to generate revenue from leasing the property. Existing communities in highly desirable locations are also undergoing dramatic transformations, with long-term owners "cashing out" to buyers who demolish existing homes in order to construct their dream second home on prime parcels of land facing an ocean, lake or river. Few have stopped to ask what will happen to our communities when land prices make it impossible for any but the very well-to-do to live there. Who will work for the public sector to construct and maintain infrastructure? Who will fill service-sector jobs in hotels, retail stores and restaurants?

The stresses caused by a dysfunction land market and the private appropriation of land values is readily apparent in New Jersey, where I reside. The Philadelphia Inquirer recently looked at the problem, reporting that in the towns that dot the coast of the Atlantic Ocean beginning just south of Metropolitan New York City, the price of houses has doubled and even tripled in less than seven years. The median price of housing in many of these communities now exceed $500,000. Not unsurprisingly, the number of year-round residents living in these communities is falling rapidly as young adults and families with children move away in search of affordable housing.

Not only young adults are affected, of course. Rising property taxes are causing older, longer-term residents and second home owners to sell. While many of us will have a difficult time feeling sympathy for people who are able to pocket several hundred thousand dollars of unearned gain on the sale of these properties, the greater societal impact should not - cannot - be ignored.

The most desired locations on the planet are on a path to become the exclusive province of the top one two percent of the world's population, set aside as gated communities only occasionally occupied and maintained by bused-in workers.