The shift by traumatized investors into real estate is hardly surprising. A house has a reassuring physical existence. Even in a depression, people have to live somewhere. You can make more widgets, but nature provides only so much real estate. For all these reasons, a lot of experts say a housing crash is unlikely.
Yet housing prices can outstrip incomes for only so long. In the past two years housing prices have been rising more than twice as fast as incomes nationally and more than three times the rate of incomes in hot markets like Greater Boston. At some point prices will level off and even decline.
Housing inflation reflects peculiarities of place. Greater Boston has a diversified and healthy economy with a lot of affluent professionals. It also has a relatively large student and immigrant population. Some $2,000 a month in rent is unaffordable for working-class families, but four students (or six immigrants) sharing two or three bedrooms can manage it. This also bids up prices.
Boston, further, is an old city with little buildable land in its core areas. And federal housing subsidies have virtually disappeared. A generation ago the government was adding significantly to the housing supply. Today, through modest voucher programs, government mainly subsidizes demand, which only bids up prices of a limited stock of homes.
While abrupt declines in real estate prices tend to be rarer and more moderate than stock market collapses, they do occur. And they are nothing if not local. Indeed, the cliche that three factors influence the value of real estate -- location, location, and location -- is true not only of neighborhoods but of entire regions. Big collapses in real estate prices tend to occur mainly when regional economies tank or go into long, slow declines.
I once paid a call on a distinguished economist whom I had long admired. I was surprised to learn that he lived on Park Avenue and even more surprised when he ushered me into his splendid duplex.
He must have read my mind. He wasn't independently wealthy, the economist explained, or even unusually shrewd. He was simply the beneficiary of lucky timing. The economist bought his place at the bottom of the 1975 local economic collapse, when New York City had defaulted on its bonds and the middle class was deserting the city in droves. People had even begun using the D-word, Detroit. The price: $60,000.
And speaking of Detroit, my friend Barry Bluestone, who directs the Center for Urban and Regional Policy at Northeastern, tells of going back to visit his childhood home in the early 1990s in a nice, suburban-style neighborhood just inside Detroit's city limits. The neighborhood is still immaculate and middle class, now mostly African-American, and the house is the lovely four-bedroom brick Colonial he remembers, of the sort that would cost perhaps $750,000 in suburban Boston.
Barry knocked on the door, explained that he'd grown up there, and was rewarded with a friendly tour of the house. As he was leaving, he inquired, ''I hope you don't mind my asking, but I wonder what you paid for this house.'' The owner replied, ''$24,000.''
How can that be? Detroit has experienced a massive outflow of people, losing more than half of its population over the past three decades. So even in well-tended neighborhoods there is far more supply than demand. New York City's housing market came back because people did. Detroit's did not.
The same stagnation of housing prices is affecting much of upstate New York and many prairie states of the Midwest because of declining economic activity and declining populations. You can buy a terrific house for a song in Fargo, N.D., or Schenectady, N.Y. Even two hours west of sizzling Boston, just beyond commuter range, charming large victorians are going begging for $200,000.
In any sort of boom, whether in stocks or real estate, it's hard to remember that what goes up can also come down. But most big real estate busts occur because of prolonged regional economic declines. It's also comforting to realize that if the market value of your house drops, it's still the same house with exactly the same value as a place to live.
