Rising Cost of Real Estate Term Paper

Excerpt from Term Paper :

prices of real estate are on their way up and thus it would be a prudent investment for a person. The reasons for this are a continuous hike in prices, and there are clearly two main reasons for the increase in prices -- the decrease in interest rates that have occurred in spite of steps by the government to the contrary and the speculative activity that is taking place in real estate. It would be noticed that people are moving out of the decisions of the government regarding interest rates, and interest rates are likely to remain low for some time which would make an investment in real estate a prudent investment. Regarding the speculative part of the investment, it is likely that even in spite of the increase in prices, the returns from real estate is still low as compared to other investments and the yield is likely to be maintained. However as is the case for any speculative investment, this cannot be a long-term strategy. Some of the fall out effects of this price rise are also worthy of note.

The Rising Cost of Real Estate


The rises and decreases in price of any product is a method for individuals to gain money and there are no moralities to the issue. On the subject of real estate, one must understand that the price of real estate varies from area to area, but there is a general trend in the market. In the case of Washington DC it has been seen from February that the prices of very similar houses have been going up steadily and even though the houses were being sold only a few months apart from each other, the prices of the latest was about $15,000 more than the previous house of the same type. Taking the case of a four-bedroom colonial house, one buyer had to spend $30,000 more than the previous sellers had asked for a similar house just 20 days before. The house had even started off a bidding war and the buyers had to pay $26,000 more than the asking price to get the house. (Deane, 2005)


It is not that prices are going up without a reason -- one of the main tasks of the real estate agents is now to protect the homes from misuse. This has led to an action in Massachusetts against the common cold drug called Sudafed. There is a proposal to put the nasal decongestant out of the free drug store sales and lock it up behind pharmacy counters. There is no specific grudge against the medicine for cold, but the product is a main agent for the illegal manufacture of a drug that takes teens into its grip and wreck happy homes. The dealers for drugs buy up on Sudafed to convert it into crystal methamphetamine, which is also called "crystal meth." At the same time when this conversion is done illegally, the entire home is filled up with noxious fumes to make the house inhabitable due to the deficiencies of the illegal home lab. (Voorhis, 2005)

Earlier the craze for this meth drug was only in Oklahoma, Iowa and Texas, but the craze is now moving east. This has led to proposals for legislation to make the base material, Sudafed tablets under lock and key in the pharmacy stores. There will be no restrictions on the liquid form of the drug as it cannot be used for such purposes, apparently. When the new law is passed, the intending customers would have to request for the drug, sign for it and show identification to prove that they require the drug. The purchase limits will also be fixed to three packages a month. The restrictions might seem severe, but there are also other states which are proposing similar laws. The entire efforts are being taken up by the real estate agents to keep the properties as habitable and this is certainly a worthwhile effort. (Voorhis, 2005)

At the same time, one has to understand that the prices are rising fast. According to the picture that is seen, there are very few houses for sale and this is leading to the increase of prices at a very rapid rate and that in turn is leading the buyers into a bidding spree against each other. This is the general scene during this time of the year and is happening from year to year. For the Washington area, there have not been any calculations as to how much the prices have increased, but the estimate of the local agents for real estate say that there has probably an increase of 15% since the beginning of the year. The calculated figures for the increase last year are available and then the increase was 21%. The calculations for last year are calculated by the Office of Federal Housing Enterprise Oversight, and that is an organization of the federal government to track housing prices. The same agency states that the prices have increased by 89% over the last five years. For the people who own these homes, it meant a fast increase in wealth though it may not have been realizable. At the same time it has led to the stretching of budgets for those who were planning to buy homes, and also the first time buyers were getting stuck in homes which they had bought the first time. This is also leading to a shortage of homes as they are not able to trade in their homes for bigger, better houses. According to some, this is leading to a bubble and that will lead to a gap between rental costs and ownership costs. The reason for this is that there are a large number of investors buying rather than occupants buying. That means that the boom has been sustained through the low interest rates and that kept monthly payments down even with increases in purchase prices. (Deane, 2005)

It is clear now that there is an increase in housing prices that is taking place, and two reasons have been offered for the same -- as a compensation for the housing agents who are doing a service, and the second as a result of low interest rates. When one looks at the total picture, then one will see that the increase has taken place not only for the last two years, but has been happening since late 1990s. Another theory has been that the increase in prices have taken place is due to the shortage of land, and this is causing the increase in prices of houses. This cannot happen all of a sudden as the growth in population is a slow process and the shortage of land, even if it has occurred has not taken place all of a sudden, but had to be a slow and gradual process. (Shiller, 2005)

The other logic that is given is that items required for the building of houses -- labor, lumber, concrete, steel, etc. -- all have been in very heavy demand and this has led to the rise in prices. Yet, the increase in prices of these items has only followed the long-term trends of growth for prices of every commodity in the world. This brings us back to the argument that the increase in prices is due to the cuts in interest rate that have been implemented in many countries, and the U.S.A. To take care of the weaknesses of the global economy. This has certainly contributed to the increase in growth, but the interesting feature is that the regular and concerted boom that is being experienced now is not likely to be only due to this reason. We have already seen that there is no way of explaining the rise due to increases in population or building costs. The increase in housing prices have increased very sharply from 1998 and this is happening not only in USA but in many other cities of the world. (Shiller, 2005)

The increase in housing prices in California has hit the education scene in Bay Area, and while the owners of the houses are seeing that their investments are yielding very good results, the effects on the education scene is harmful. The increase in cost has made it impossible for young couples with small children to move into the city area. This is resulting in a massive drop of enrolment in that area and the schools are getting hurt. One of the school teachers has tried to analyze the situation and he has found some cause and effect. The pattern earlier was that families with small children moved into the area, raised their children and then moved out after recovering their investment through sales to a new family. Now all the families with small children seem to find it very difficult to come into the area and in spite of the drops in birth rate, the schools in the outskirts seem to have an increase in enrolment. (Nevius, 2005)


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