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Post by Cynthia Vincent on Jun 14, 2005 19:00:36 GMT -5
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Post by Jay Iwahashi, GRI on Jun 23, 2005 20:23:23 GMT -5
[glow=black,2,300]Here's the article for those too lazy to click![/glow] ;D
By JUNE FLETCHER
Special to RealEstateJournal
Question: How do you know when there is a real-estate bubble? What do you measure, what factors are involved and how do you calculate it?
-- Zack, Laguna Beach, Calif.
Zack: Ah, if I had a dollar for every time someone asked me about real-estate bubbles...well, I still couldn't afford to buy a place in Laguna Beach, Calif., where the median home costs $1.2 million.
Laguna Beach's homes went up 34.5% in the past year alone -- does that mean it's in a bubble? Is $1.2 million too much to pay, given the price is about twice what a median home in surrounding Orange County costs? Does it matter that the median-priced home is about 16 times the median household income for the town, about $76,000? Or that the inventory of homes at the end of last year was low, at 112 units? Or that population growth exceeds the number of new houses built by a ratio of about four to one? Or that rents range widely, from $1,475 a month for a one-bedroom apartment to $25,000 a month for a four-bedroom oceanfront home?
Does your head hurt yet? Mine does.
That's the problem with trying to find whether a particular real-estate market is in a bubble and ripe for a quick decline (assuming bubbles exist -- not all experts think that they do). Numerous factors determine whether prices are in line with what people can afford and are willing to pay. These include job and household growth, inventory levels, rents, in-migration from other areas, land costs, new-home supply and discounts being offered on them, and the age of the housing stock.
All of these factors are in constant flux, and economists can't agree on the relative importance of them, or sometimes, even how to measure them. Psychological factors play a part too, and these can't be quantified. For instance, if the local media say price declines are likely in a certain neighborhood, it often becomes a self-fulfilling prophecy. So, short of massive layoffs, an Enron-like collapse, or some other catastrophe in our market, it's really impossible to determine with any certainty when, or even if, the "tipping point" will occur. (Many economists try, but their prognostications are hardly exact -- virtually no one predicted that home prices would rise 8.3% last year, a historic high; instead, anticipating a rise in mortgage-interest rates that didn't happen, most economists predicted price growth would slow.)
In fact, experts can't even agree on whether there's currently a real-estate bubble on a national scale.
"I'm a bubble believer," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. He notes that rents haven't risen as quickly as home prices in recent years, and warns of a possible collapse in the face of a weakening dollar, massive deficits and an expected rise in mortgage interest rates.
"There is no bubble," insists David Stiff, senior economist at FISERV/CSW in Cambridge, Mass., who's predicting strong price gains for the coming year, though not as spectacular as last year.
And though many economists say if there's a bubble anywhere, it's in Southern California, I say, in the wake of all this uncertainty and debate, relax. Trying to time the real-estate market is as futile as trying to time the stock market. Whether or not there's a bubble, if you expect to stay in an area for more than two years and can afford it, it will probably be in your best interest to buy rather than rent, especially if you can snag a low-interest, fixed-rate loan. And if you stay in your home for six or seven years, the average length of time Americans stay in their homes, you will likely ride out any downturn in the real-estate cycle, even if the market happens to collapse on the day that you close.
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