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Finance: Is Real Estate Boom for Real?
Sat Sep 28, 7:53 AM ET
WASHINGTON (Reuters) - If your neighborhood is starting to feel like the Nasdaq, you might be part of a real estate bubble.
The price of the average house has risen 33 percent in the last five years and 10 percent this year alone.
In some parts of the country, prices are rising 20 percent or more, and the summer has seen a sort of buyers' frenzy: Some people are panicking that if they don't buy now, they'll never get in.
Others, remembering what happened after the panic buying in tech stocks, worry about the debacle to come. They can probably both relax.
"Price bubbles don't burst. They deflate," said David Lereah, chief economist for the National Association of Realtors.
In other words, prices might stop rising so quickly, but they're not going to drop. Oh sure, given his position, he would say that, but he has some statistics on his side. There's never been a time since World War II, that home prices have declined on a national scale. Even Federal Reserve ( news - web sites) Chairman Alan Greenspan ( news - web sites) has pooh-poohed the idea that real estate prices would go down in flames.
There is a minority view. Edward E. Leamer, director of the UCLA Anderson Forecast, measures real estate values by comparing home prices to the rents those homes could command. That relationship has gone off kilter, he has said, with price growth far outstripping flat rents and indicating that real estate might be overvalued on a national scale.
Some homeowners are even selling their homes and moving into rental units just to capitalize on what they see as an overinflated market about to burst.
But not many of us care about what houses do on a national scale: We care about what they do in our own neighborhoods the ones we aspire to live in. And in localized cases, real estate values can indeed fall. Remember Houston in the 1980's? The oil industry's unemployed walked away from houses that had become worth less than the mortgages they were still holding .
There are always great reasons to buy real estate. You can live in it while it makes you money and the Internal Revenue Service ( news - web sites) likes to reward you with tax breaks when you buy, finance and sell your home. And you do own something real. It's hard to imagine a situation where a house would become as worthless as, say, some Enron or WorldCom stock. Furthermore, there are rosy indications in those demographics -- the baby boomers' babies are about to enter the market at the same time their graying parents shop for second homes.
But it wouldn't hurt to be cautious if you were getting ready to buy real estate. In this market, don't buy something you can't comfortably afford. Lusting after a beach house that went up 30 percent in the last year? Such a purchase might make sense if you're sure you can carry it over the long haul; they aren't making more beach and baby boomers are starting to load up on second homes.
But if you would have to sell in a hurry if you lost your job, you could end up taking a loss on property like that. So don't strain your budget to buy a home that has appreciated dramatically.
Look carefully at your market. If you live in a one-company, or even one-industry town, beware of price spikes. If you are eyeing a new cul-de-sac development surrounded by land that could be turned into more of the same, beware of overspending on property that can be held in check by new supply. And, surprisingly, be aware of overspending near big cities that have tight real estate markets.
Cities like Washington, Boston, New York and San Francisco have seen prices fall when they hit the following scenario, described by a spokesman for the National Association of Realtors: Mortgage rates fall and supply gets very, very, tight in popular close-in-neighborhoods. Prices surge, and then mortgage rates go back up. The number of people who can afford the houses declines and the high prices go away as well.
The bottom line? If you want to buy a house for the long haul and can comfortably afford it, go right ahead. Maybe you'll be overspending a bit, but you'll get your house and chances are you'll get your money out of it too. If you're looking for a nice investment property, you may have missed your bargain. And if you think you might have to sell in a year or two, be very, very careful about borrowing to the max. You might end up, as Lereah might say, deflated.
(Linda Stern is a freelance writer who covers personal finance issues for Reuters. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at) aol.com
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