The Housing Bubble
It�s almost impossible to pick up a financial newspaper without seeing mention of the �housing bubble� nowadays.
What is a bubble?
When a bubble pops, all you are left with residue - a soapy gooey splotch on the floor.
Everyone has heard of the �dot.com� bubble. The NASDAQ stock index had lots of �dot.com� companies in its index. That index more than doubled in value over one year to reach a peak of 5132.52 on March 10, 2000. Then it began a decline. At its low, the value was 21.6% of the index at its peak.
Now, that is a bubble.
Japan�s Nikkei index peaked out at 38,957. The air leaked out and the index bottomed at 7607, 19.53% of its former value.
A gooey messy residue on the stock market floor.
Financial experts are now talking about a �housing bubble.�
If you think million dollar homes will someday be selling for $200,000 � that is a bubble.
Has there been such a bubble in the past?
Using statistics from the National Association of Realtors going back to 1968, the median sales price of existing homes has never shown an annual decline. The slowest price increase occurred in 1989 (0.22%).
That is slowing price appreciation, not a bubble. Prices still went up.
The experts counter by saying that they don�t mean a �national� housing bubble, but there will be pockets of price decline and that there has been depreciation of home values not long ago. They usually cite California as an example.
So what did happen in California?
Was there a housing bubble?
The median price of California homes hit a peak in 1991, followed by five consecutive years of declining home values. At the bottom, the median price was 88.34% of the peak.
Almost a twelve percent loss in value.
The Scary Bubble
Bubbles lose about 80% of value, not twelve percent. Maybe the difference seems moot, but �housing bubble� has such a dramatic ring to it, and it sounds scary.
Plus, it sells newspapers.
Is it possible that house values will decline soon?
No one can really predict.
What does history show?
Returning to California as an example, the median price has increased 72% over the most recent three years.
Between 1974 and 1977 California median prices increased by 80%. Faster appreciation than now. Three years later, median prices had increased another 60%. Ten years after that, home prices had doubled again.
Then there were five years of declining home values. A total twelve percent loss in value.
What�s different this time?
Expressed in dollars, the recent increases in value seem extreme. As a percentage of the home�s cost, appreciation has been more rapid in the past and there could be many more years of appreciation in the future.
But no one knows.
Housing Bubble Protection
If no one can predict if or when prices will decline or by how much, how do you protect yourself?
You do it the �old-fashioned way.�
When you buy a home, buy one you intend to own for a long time. The cost of a house isn�t just the price you pay for it and price may not be as important as your carrying costs. The largest cost is your mortgage payment. With low interest rates, people can afford more expensive houses because their payments will be low. If possible, skip the �first-time homebuyers� house and buy the �move-up� house. That saves you one move, saves you costs, and puts you in a position where you don�t have to sell.
You see, how much your house goes up or down in value each year doesn�t make any difference at all � until you have to sell it.
Then, if you�re selling in a slow market � you�re also buying in a slow market. If you�re buying in a hot market � you are also selling in a hot market. It equals out, provided you have equity enough to make your next purchase.
But if you�re buying a home to �flip� it in a year or two and the market does turn against you, you could be hurting � providing you have to sell. If you're buying just before a down market and you get transferred or relocated, you could be hurting, too - providing you have to sell the home.
There probably is not a �housing bubble� in the way that there was a Nikkei bubble or a dot.com bubble. However, it is quite likely that there will be some time in the future when values decline, at least in certain areas. It could be in a year or it could be in sixteen years.
How did most people cope in the past?
They rode it out. They didn�t sell. Later, prices recovered and bypassed previous highs.
Right now, those are some pretty happy folks.
� copyright June 2005 by RealEstate ABC
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