Run up in housing prices 1970′s vs. 2000′s

I have just started reading a book published in 1989,”Secrets Of The Temple, How The Federal Reserve Runs The Country.” I know that most people have no interest in the fiscal policy of the Federal Reserve except for how it affects us individually. However, it has been interesting to read about the events as they unfolded. While the book talks about many economic sectors, housing always catches my attention. Listen to this quote taken from pages 84-85 of the book referencing the housing “frenzy” in 1979. Tell me if it doesn’t have a similar tone to what we have been told about the current housing crash. Granted in this excerpt interest rates are much higher.  My comments are added as blue in-line text.:

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“In southern California, the action was housing. Across the nation, the value of property was increasing monthly at an annual rate of 17 percent but the truly spectacular boom was in the splendid towns and cities along the Pacific coast south of Los Angeles. (Sounds like similar housing appreciation that was experienced during this last boom) The San Diego Board of Realtors had doubled its membership since 1975. In affluent communities like Newport Beach, housing values increased by 100 percent in less than five years.  (Sound familiar? Only this time all price points were affected not just affluent areas) Herbert Young, president of Gibraltar Financial Corporation, a Los Angeles savings and loan, kept thinking the market would cool off as interest rates on home mortgages continued to rise. In the beginning of 1985, the mortgage rate in California was 9.25 percent. A year later it hit 10.75 percent. By September, it was above 12 percent.  “I would have sworne that the 11.5 would put a nail in the coffin,” Young said. “But the buyers out here are voracious.” Instead of looking backward, home buyers were looking forward. “People usually look back to six or nine months ago and they see lower rates and they expect those rates to return.” Young explained. “But that didn’t happen. This time, they were looking ahead and saw higher rates.” (Yes our interest rates have remained lower but people still saw the price of housing increasing so fast it was hard to resist jumping in.  Everyone was also looking forward this time as well.) People were not simply buying homes to live in or even as long-term investments. They were buying homes in order to sell them again quickly. (Can you say flipping?) The Irvine Ranch, a huge housing development in Orange County, was celebrated for the transaction in which a buyer bought a condominium for $87,050 and resold it two weeks later – before the mortgage closing was completed – for $117,500. (Don’t you wish that prices were still this low. Oh, and wouldn’t it be nice to flip a property without having to do anything other than re-sell it?) David Parry, an economist studying the real-estate boom in the San Francisco Bay area, overheard a conversation between two buyers in a Contra Costa County subdivision. Between them, they were purchasing six houses on six different streets. The manager of the development conceded that 60 percent of his sales were to people who did not intend to live in the homes. (Hmm. can you say Florida, Nevada, Arizona, California?) “You could see the speculation in the advertisements,” Parry said. “Homes were advertised for resale that hadn’t been built yet. In the ads, they used pictures from the housing brochure.”

This excerpt was from the boom.  In my next post, I will share another passage that talks about what happened when the Federal Reserve implemented its policy of limiting the money supply and letting interest rates react to this tightening.