Housing Bubble Warnings...
"Will There Be A Housing Bubble?"
"Housing Bubble Far From Bursting"
"Shrinking The Housing Bubble"
"Don't Get Trapped In A Housing Bubble"
Yadda, yadda, yadda.
Housing bubble warnings have become as ubiquitous as terrorism alerts -- and their usefulness is just as hotly debated.
Some economic and real estate experts have cautioned that in recent years some real estate markets have experienced rapid, but unsustainable home price appreciation and, as a result, have become "housing bubbles" that will suddenly pop and deflate, you know, like a bubble.
Where bubbles are most likely to burst varies, but the usual suspects can be found in the San Francisco Bay Area and the Northwest, the New York City area and the Northeast, New England and Denver, among other locations.
The pin that pricks the bubble can be declining corporate sales resulting in growing joblessness and falling incomes or other economic conditions that force droves of buyers to leave the market and send home prices plummeting.
The prospect of holding a mortgage that's larger than your home's value or buying a home that suddenly plummets in price -- bubble bursting conditions -- are pretty scary events, especially to those who've been there and done that.
"There is a real problem with a bursting real estate bubble if you don't have a secure job. The worst case is a relatively recent buyer who bought at the peak and finds himself laid off during a weak housing market. This will increase foreclosures and the number of people who find that their down payment investment has been wiped out," said Eric Tyson a New England investment counselor.
But what good is all the bubble hubbub?
The basic media argument is "the public's right to know". With knowledge, consumers can make informed decisions about events that can change their lives -- provided the information is correct.
"The problem is, the fundamental assumptions are simply wrong. For example, doing a price-to-earnings ratio like you do with stock is wrong. It should be a monthly payment-to-income ratio. An investor makes their investment decision based on the price of the stock, but a home buyer makes their decision based on monthly costs. This is because stocks are purchased for cash and homes are purchase with loans that equate to a series of monthly mortgage payments," says Richard Calhoun, a real estate statistician and broker/owner of Creekside Realty in San Jose, CA.
And even if the reports are dead on, just as those who say terror alerts do little more than raise the nation's blood pressure, some real estate experts say reports of housing markets due to pop are little more than unnecessary doom and gloom forecasts about which consumers can do little if anything.
If the bubble pops, some argue, the best you can do is to go about life as usual.
"I don't believe theorizing about a bubble bursting in the housing market is a good idea. All it does is create news and infect people with negative prognostications that have no basis. The simple fact is that there is an inadequate supply of housing, almost nationwide and interest rates are at extremely low levels. Why should there be any bursting. Our economy provides supply whenever there is demand for product. The only barrier to that are those people who stand in the way of the free market system. That is what causes bubbles," said Stephen J. Hanleigh, president of the Santa Clara County (Silicon Valley) Association of Realtors.
Those who agree, also fall back on the long term real estate ownership and investment argument. Even if a bubble does pop, the real estate market seldom falls further than it's risen and it always comes back. Ride it out, they say.
"This is not day trading. The life of a real estate investment is not measured in days, weeks or months, but in years. And, understanding this, a smart investor hangs in there. The trick is to make sure you don't overextend, that you have enough resources to sustain the investment through the lean times," says Ida Abelson, broker of Brickyard Realty in Point Richmond, CA.
For some, however, life as usual simply isn't an option.
"Last time in Boston some people could not proceed with their life as usual. They couldn't sell, so they couldn't move, so they couldn't have another child, they couldn't get into a better school system, etc. Rather than proceeding with life as usual, many life transitions were put on hold. I'd need to check my stats but I believe it took some places in Boston seven years to recover," said Bill Wendel of the Real Estate Cafe in Cambridge, MA.
But doesn't a soft market make for an opportunity to buy?
"For those who are tempted to buy into the market now, I think it is a different story. Why buy something that is overvalued by 36 percent, just because rates are low? And why buy now when home owners in Boston have become so irrational (if not self-destructive) that they are paying almost half of their income towards housing, when there is talk of deflation. If someone buys today, and real housing values (not asking prices) decline over the next several years, isn't it conceivable that the gap between their purchase price in 2002 and real value in 2004 or 2005 could be larger than 36?" asked Wendel.
Perhaps more drastic measures are necessary. Why not just get out of the real estate market?
"If you know that the bubble is bursting and you know prices will drop more than 10 percent then sell and grab your equity and only reinvest when prices start increasing. But this is extremely hard to know so most homeowners will simply ride the price down and back up," said Calhoun.
But where will you live? Draining your equity on rent could be a losing proposition in a market of prolonged deflation.
A recent Smart Money thesis on the subject suggests everything from taking out equity loans as a financial cushion to peforming value-boosting home improvements to guard against the financial ravages of a bubble bursting.
Spending more money on the brink of personal financial collapse, however, could be fatal to the household budget.
If there is any consensus about what to do about housing bubbles, it's the personal approach -- as it is with most residential real estate transaction decisions.
"What a homeowner should do in a bubble-popped market all depends on their personal situation. Can they hold on? Are they going to lose the property? How important is their credit score? What do they think the future will be?" asks Calhoun.
Like it or not, it's life as usual.
Published: November 22, 2002
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