A friend from the sixties breezes into Santa Fe. He’s been living in Spain for the last twenty years. Before that, he lived in London and New York. Within weeks he is buying a house, plunking down something north of a half million dollars.
“The ‘City Different’ isn’t cheap.” I comment.
He looks at me with disbelief. “You think so? When were you last in London? Or Dublin? From Marbella everything looks cheap. I want to sell my place in Spain while the Euro is still high.”
Welcome to the world of relative values. While our press is filled with increasingly shrill stories about the real estate bubble--- how it is fueled with cheap money and speculative excess ---precious little attention is paid to the positive forces driving domestic home prices: globalization, growing population, rising domestic wealth and income, and taxes. Let’s consider each.
European homes have always been expensive relative to American homes. That’s why domestic executives get added allowances for housing abroad. It’s also why the marketing people at WCI Communities in Florida talk about the number of Europeans who are buying homes in Bonita Springs ; why you’ll hear German spoken in Scottsdale; and why the Santa Fe Whole Foods Market is a Tower of Babel during the Christmas season. We may have sticker shock, but America looks like a bargain to Europeans.
Housing prices rise where the population is growing. They fall where it is shrinking. That makes lush spots in the U.S. more attractive than Spain or Italy where the population is heading for decline. France will follow. Message: rent Tuscany, Majorca, or Provence. Buy Jackson Hole, Palm Springs, or Nantucket.
Rising wealth and income supercharges home prices because our homes display our success. Few understand the affluence surge of the last 20 years. According to the Spectrem Group in Chicago, there were 7.5 million U.S. households with net worth, excluding home value, of $1 million or more in 2004. That’s an increase of 21 percent from the previous year.
The same applies to income. The most recent Social Security Trustees report tells us that only 10 percent of all wage income was over the wage base cap in 1983 but 15.1 percent is over the $90,000 cap today. There is a lot more buying power at the top end. It increases expectations and home prices.
Finally, if analysts and economists expected stock prices to rise when the tax rate on dividends and capital gains was cut to 15 percent, what do you think should have happened to home prices when returns were made tax-free in 1997? Today, if you buy the right house, you can pocket $1,000,000 in capital gains tax-free every two years--- and you can borrow virtually every dime required to buy the house.
Can you name an investment that can beat that? I can’t. Small wonder housing prices have been rising rapidly, particularly in states with high income taxes--- like California, Massachusetts, and New York.
Does this mean you should join the buy-to-flip crowd?
No way. Own a primary home that makes sense to you. Own a second home you can afford without rental income. Enjoy, at your leisure, the continued power of those four big forces.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.
