If you have ever had the great misfortune of shopping for an apartment in New York City, you probably already know how insanely expensive real estate can be in the Big Apple. A minuscule humble abode, that would be considered pretty awful by nearly any other city’s standard can easily cost more than a million dollars. New York City has always been pricey, but the past five years have seen prices soar. There’s a gold-rush-like construction boom going on, as developers race to cash-in on ever-upward prices in the city.
New York City is not alone, as this same story is taking place across America. From quaint suburbia hell rising from empty fields in Central Florida, to glitzy McMansions popping up in the posh suburbs of St. Louis, real estate development is back from the dead in United States.
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The Great Recession caused some pretty dramatic declines in real estate values nationwide. The precipitous fall in prices paralyzed construction projects, and left millions of our countrymen who had bought into the “American Dream,” very underwater on their mortgage (that means they owe more than the house is worth).
Legions of people walked away from their worthless homes and the flood of foreclosures further depressed prices. Even solidly upper middle class suburbs were blighted by the recession, littered with abandoned homes that brought down the value of entire neighborhoods. Today, prices in most cities are trending upwards, as the wounds from the Great Recession real estate bust are fully healed.
While this latest uptick in real estate cannot compare to the last boom (2002-2007), prices are starting to appear unreasonable again. Average incomes have not risen in quite some time, so housing costs are consuming a greater amount of people’s take-home pay. That’s not stopping people from buying, because rents have also gone up enormously in the past five years.
[graphiq id=”8XfKdV1QDoF” title=”U.S. Median Qualifying Income for Homeownership” width=”600″ height=”400″ url=”https://w.graphiq.com/w/8XfKdV1QDoF” link=”http://places.findthehome.com” link_text=”U.S. Median Qualifying Income for Homeownership | FindTheHome”]
If you have good credit, and a stable job, and can qualify for a mortgage, there’s little reason why a rational consumer wouldn’t take the plunge and purchase their own home. My Facebook feed is constantly full of people sharing pictures of their home they bought—Millennials who are able to get financing are buying houses in droves.
[graphiq id=”cdwG3htp69T” title=”30-Year Average Fixed Rate Mortgage in the United States” width=”650″ height=”492″ url=”https://w.graphiq.com/w/cdwG3htp69T” link=”http://mortgage-rates.credio.com” link_text=”30-Year Average Fixed Rate Mortgage in the United States | Credio”]
New Federal mortgage rules mean that the ultra-loose lending practices that caused the last real estate crash probably won’t be the culprit should prices start to tip downward. Historically low interest rates are probably behind a great deal of price appreciation, and no one knows how sustainable those price gains will be as interest rates eventually go up.
At a certain point, if the relentless march upward in prices continues, most average consumers will be priced out of owning a home—and that in itself could cause a correction. Another recession or an uptick in unemployment could also spell doom for the housing market, and would leave those who took the plunge and bought a home during this latest boom underwater.
Herein lies the danger of another real estate bubble—millions of Americans felt hoodwinked by the last real estate bust, and another crash could permanently undermine confidence in investing in housing. Before the mid-2000’s crash, many of us had never seen a sudden decline in prices, and that led an entire generation of buyers to believe that prices would never decline. Today, many of us have barely recovered psychologically and financially from the last crash, and we would be woefully unprepared for another dip in prices.
The so-called “wealth effect” is powerful phenomenon in the modern economy. An average family’s biggest asset is their personal home, so when prices are going up, they feel wealthier. Conversely, when prices plunge, they feel poorer. That’s what made the last recession so damaging, and it took many years for households to regain confidence in their personal finances.
Another sudden deceleration in real estate would shake the core of our nation’s economy, and leave many Americans wondering if the “American Dream” is merely fiction in a world of boom and bust real estate, where their life savings can be erased by one economic hiccup.
Photo by @xonecole
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.