Real Estate Bubble

THE GREAT REAL ESTATE CRASH OF 2005?

At the end of summer, areas of the local real estate market quietly shifted to one that is much more friendly to the buyer. Listings are staying on the market longer allowing for an inventory to accumulate. Additionally, typical contract contingencies that sellers had not seen in recent years are becoming part of the sale.

In my opinion the reporting on this subject has been exaggerated and alarmist. Though the run-up in prices has been extreme in some areas, economic fundamentals are still strong. Price stagnation is not an emergency and a respite in unsustainable increases is not a disaster.

The most likely future for housing is a soft landing. Although prices may decline in a few overheated markets, in most areas home prices will continue to rise, albeit at a modest, more sustainable pace than the past few years.

Take Las Vegas. The city was at the crest of the housing market two years ago, experiencing 52 % annual price appreciation. Price growth eased to 30 % last year, and in mid-2005 it stands at 15 %. That is a balloon leaking air, not popping.

This trend continues in other parts of the country. The D.C. area added 110,000 jobs over the past two years but only 57,000 new homes, keeping demand ahead of supply. With mortgage rates inching up, price appreciation is expected to slow to 20 from 10 % before settling in the 4 to 6 % range for the remainder of the decade.

The widely held comparison to the “dot com” bubble is not valid because the circumstance simply does not play out the same way. A large portion of residential real estate in this country is owner occupied and even if prices begin to fall a majority are not going to sell off their homes in a panic. For the most part, they will continue to live there and ride out an adjustment in the market.

In the long term things look very good: According to new studies from the Brookings Institution and VA. Tech, in the next 25 years the U.S. will need to build 200 billion square feet of homes, offices, factories and other structures to accommodate 70 million more people and to replace homes and offices erased by everything from natural disasters like Hurricane Katrina to plain old obsolescence. Researchers estimate that this massive build out will add up to a $25 trillion development market by 2030, more than twice the size of the entire U.S. economy today. Just something to consider the next time you notice a housing bubble headline.