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Bubble-Proof Housing Markets?

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According to the experts over at Business 2.0, there are five bubble-proof markets. They’ve listed those markets, their historical appreciation rates (from 1949 to 2006, national average is 2.3%), and the reasoning why they’re “bubble-proof.”

1. San Francisco – 4.2% appreciation rate – The reason they give for this area being bubble-proof is because of the abundant green space and the fact that builders can’t build on the green areas like Treasure Island, Presidio, and the Marin Headlands.

2. Los Angeles – 3.7% appreciation rate – The reason for LA being bubble proof is that there’s no more room, 75% of development is in areas filling out Los Angeles.

3. Seattle – 3.2% appreciation rate – Another bubble-proof city protected by the fact that you can’t make any more land, recently the city council approved new zoning laws that removed restrictions on building heights downtown.

4. Boston – 3.0% appreciation rate – The first non-West coast city listed and the first city protected by something other than the fact that there is no more land, Boston’s bubble-proofness is the result of strong wage growth.

5. New York City – 3.0% appreciation rate – It’s New York City.

via Business 2.0.

{ 8 comments, please add your thoughts now! }

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8 Responses to “Bubble-Proof Housing Markets?”

  1. Tango Uniform says:

    It looks like 4 of these pretty much amount to “they’re not making any more land.” Tell that to densely populated Japan. They just saw 15 years of declining house prices. I’m not saying we’re exactly like Japan, but the “not making any more land” argument itself is not enough to guarantee bubble-proofness. In fact, I think it’s a very weak argument when you consider the unprecedented nationwide mania we just passed through. In a year, I could imagine hearing “Who cares if they’re not making any more land? That crackerbox is just not worth it, and I still can’t afford it, and who wants to buy an asset that’s declining in value?”

    That said, I think that NYC, Seattle, and San Fran with fare better than most coastal cities. Boston and LA, don’t count on it.

  2. I guess if you take a long enough time period any market is bubble-proof.

    They’re not looking at the ups and downs of those markets. It’s a fair assessment if you’re looking at the big picture. But those folks who can’t sell their homes in these markets aren’t thinking they’re getting any kind of appreciation.

    – Bryan

  3. LAMoneyGuy says:

    I’m with Tango and BCF. LA is bubble proof? Don’t tell that to anyone who sold a house in LA anytime around 1992-95. Should they have “held for the long term”? Sure, but just like many of today’s interest only/neg-am holders, they were unable to. Then it was a weak local job market. Today, it’s greater fool mania.

  4. I think Boston is mostly bubble-proof because of the lack of land, and the great colleges (Harvard MIT, etc.) and hospitals (Mass General, Brigham & Woman’s, etc.). I’m not saying that others on the list don’t have those, but I think it’s more prominent in Boston. And there really is no more land to build in Boston.

  5. Nick says:

    I’d put DC and its suburbs at a close 6th, maybe higher. Businesses are moving more and more to where the money is–the federal government. House appreciation rates around here are starting to slow, but that just means single-digit annual appreciation instead of double-digit.

  6. Miller says:

    First off, I like LAMoneyGuy’s comment. I am from LA, and my parents bought a second house right around that time. The market lowered and my dad soiled his underwear. Luckily, my mom stuck it out (they separated around then, unrelated to this house of course) and sure enough, LA is sky high once again.

    However, what I actually wanted to say is that these “bubble-proof” arguments appear to be based in “supply-demand” (and supply is now fixed). However, there has to be something to be said for what happens when no one but the rich can live there. Take LA. there are working class jobs that need to be filled. Those people need to live reasonably near by (in LA this means 1.5 hours away already!). There must be some ceiling somewhere! Not saying we hit it, just saying it has to be there, and at some point that “2nd order effect” will have a major impact. That or maids will be making 100k a year… =)

  7. Matt says:

    Over that long a time horizon, every investment is bubble-proof. Those statistics are meaningless when considering short-term phenomena like market bubbles. After all…until we get into space in a serious way, they ain’t makin’ any more land ANYWHERE.

    The truth is, for people who manage their finances in a safe way, housing is bubble-proof everywhere. The folks who will suffer from the bubble are the ones whose livelihood depends on their houses being a source of semi-liquid capital, not the ones who are just living in them and paying down their mortgages. If you’re going to keep living in your house, and you’re not over-leveraged on it, then it doesn’t matter if you’ve taken a loss on paper. And if you have to sell because you’re moving, it’s likely that the loss you’ve suffered will be counterbalanced by lower prices in the place you’re moving to, so it’s a net wash.

    But if you’re in the real estate market as a speculator, you’ll lose your shirt when the bubble bursts…especially if you’re holding negative cashflow property. Best make friends with a bankruptcy lawyer. And if your lifestyle is financed through HELOCs…well, you’ll be in for some belt-trimming. Likewise realtors and building contractors are about to find out what it was like to be a sysadmin or programmer in 2001-02.

    I’m not worried about the value of the house I just bought for three reasons:

    1. I plan to die in this house. I might borrow against it for business, but would do just about anything to avoid having to sell it.

    2. Lake County Indiana has miraculously avoided the massive housing inflation that’s gripped Chicago’s other suburbs. We paid $310,000 for a house that’s worth at least $350,000 on the merits (meaning that on the Illinois side of the border it’d cost at least $2 million), rather than simply based on how many greater fools could be found to pay that much later. Indeed, the second owners (aka the first people who bought it as it is today) paid $290,000 for it in the ’80s.

    3. We put a huge amount down. So much that we had more than 50% equity the day we closed. About the only way our mortgage would be underwater is if a nuclear bomb went off nearby, in which case my fiancee and I would be vapor anyway, and wouldn’t care.

  8. Foobarista says:

    One thing: even in places like SF and Silicon Valley (don’t know LA, but it’s probably somewhat true there too), the housing supply isn’t necessarily fixed. Here in Mountain View, there have been a number of “brownfield” housing and condo developments, done typically by tearing down low-density single-story apartment buildings or old office complexes. These have added several hundred units to the local housing stock in the past couple of years.

    In SF, the area around the newer SF Giants ballpark has had lots of new development, much of which is finished or close to finishing. Near my house, which is about two miles from Google, there’s a few new developments.

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