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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Oblomov who wrote (15525)12/19/2003 8:56:59 AM
From: Elroy JetsonRead Replies (1) of 306849
 
The current real estate price bubble is far more exaggerated in some regions than others. Like the previous bubble in the 1980s, the aftermath affects all areas.

My youngest Cousin just purchased a new 2,800 sq ft home in Austin TX for $170k which by my estimation is roughly a $150k home sitting on a $20k finished lot. In coastal states that $150k home is sitting on a $300k lot minimum.

In better areas of Los Angeles that home would be smaller, say a 1,200 sq ft home worth $90k which now sells for $850k. So 90% land cost and 10% building?

So one may surmise there's not much of a bubble in Austin. But I have a cautionary tale.

In 1986 I did an valuation of the Tanglewood apartment complex in Houston, where the bubble collapsed four years before it did in California. It had just been built for $64 million but, due to over-building, rents in the area supported a sale value of only $16 million for the complex. So in this case real estate was selling for 75% less than construction cost. Needless to say, the project went back to the bank - and in fact the bank went under.

One could say my Cousin is fairly safe buying a home where a 50% decline in land values would result in a modest $10k decline in value. But when Tanglewood sold for 25% of construction cost, homes in the region also sold at a significant discount to replacement value. So yes, Texas had less of a bubble than California during that period but the aftermath was fairly similar.
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