 There’s lots of bubble talk going on in real estate circles these days. It got started when the recent housing boom took off.
As more and more houses were sold, home prices began to rise. The higher the prices went, the louder the gloom-and-doomers proclaimed the "bubble was going to burst." They were predicting that people who paid the higher prices would get stuck with a home they could not sell when the high-flying prices came crashing to earth.
Their predictions, however, lack one vital ingredient – the bubble. Many experts say it doesn’t even exist. How can a nonexistent bubble burst? It can’t.
"Any bubble would have to be localized," says research economist Jack C. Harris of the Real Estate Center at Texas A&M University. "Maybe even in only one price range of homes. I don’t see the extraordinary markup usual to a bubble."
Harris adds that bubbles usually show declining sales as regular buyers are squeezed out and speculators take over. Have you seen home sales in your town going down? Are carloads of smooth talkers cruising your neighborhood with carpetbags oozing cash? I didn’t think so.
Today’s home prices are higher than they were a couple of years ago for one simple reason. Supplies are short. Does that mean when builders catch up to the demand, buyers will find themselves drowning in a bubble bath? No, says Harris. As supply catches up with demand, we should see prices moderate, he says. But that’s a long way from a collapse, which is what would happen if there was a bubble and it burst.
Harris has some high-powered folks backing him up. Federal Reserve Board Chairman Alan Greenspan is one. Greenspan recently told Congress there is no such thing as a current or impending house price bubble. "We’ve looked at the bubble question, and we’ve concluded that it is most unlikely," he said. Greenspan attributes recent "sizable gains" in home prices to "the effects on demand of low mortgage rates, immigration and shortages of buildable land."
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David Lereah, chief economist for the National Association of REALTORS®, also agrees with Harris. Given the local nature of real estate, says Lereah, it’s possible for prices to deflate on a local basis, but a "pop" simply isn’t in the cards.
Even during recessions and periods of declining home sales, the national home price has risen every year. Over time, the typical home value appreciates at the general rate of inflation, plus one to two percentage points. That’s the nature of residential real estate and one reason it’s the "American dream" to own a home. Home building and home buying are keys to why the U.S. economy has remained strong despite terrorist attacks, falling stocks and corporate bankruptcies. It’s why some say there was a recession last year, but most of us never knew it.
The housing market is fundamentally sound, say the experts. We have a lean inventory of homes, historically low interest rates, high consumer confidence and a strong housing demand from a growing population. They expect prices to appreciate even more before there’s any moderation.
In May, the national average price for an existing single-family home sold in the United States was around $192,400. A year ago it was $179,500. For new single-family homes, the national price was about $226,800. Last year it was $205,500.
The median price for an existing home sold in Texas in June was $127,900. That’s up from $125,300 in May. Overall, prices are 4% higher statewide than they were a year ago. The increases have created a sense of economic security, the so-called "wealth effect."
"When housing prices go up, people feel better," said Cary Leahy, economist for Deutsche Bank in New York. "They feel better; they spend more." |
