- The Washington Times - Thursday, November 3, 2005

Q:I have read as much as possible about Ben S. Bernanke, newly appointed to replace Alan Greenspan as chairman of the Federal Reserve Board of Governors.

He recently indicatedthat fears of a housing bubble are unwarranted.

We own a rental town house in Northern Virginia, and our tenants have given us notice. We are considering selling the property, but we fear we may have missed the boat.

There are many more town homes in the same subdivision on the market today than this summer.

Since you see what goes on every day in residential real estate, we’d like your opinion. Is Mr. Bernanke right?

A: Indeed, the incoming Fed chairman has made it clear that he doesn’t believe that a puncture in the housing bubble is in the cards.

Back in July, Mr. Bernanke credited the surge in home prices to economic factors, such as low interest rates and strong regional economic growth. Such factors, he said, don’t create a bubble waiting to burst.

Mr. Bernanke also said that market speculation could cause a fragile bubble.

“While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom,” he said.

Mr. Bernanke repeated his beliefs a few days before he was nominated to become Fed chairman. I’m not one to argue with a man who will soon be the country’s top financial guru, but I’ll certainly give you my opinion.

I think Mr. Bernanke is both correct and incorrect.

Let me explain.

It’s not reasonable to compare the possibility of a housing bubble burst with the stock market bubble of 2000. If you recall, the NASDAQ Composite stock index peaked at 5,048. Today, 5½ years later, it’s hovering just above 2,000. The NASDAQ lost 60 percent of its value.

Mr. Bernanke is correct if your definition of a bursting housing bubble means that home prices are going to drop by 60 percent. That’s not going to happen simply because real estate is a very different type of asset from stocks.

Stocks are freely tradable and can be purchased in tiny amounts. You can buy and sell 50 shares of any given stock over the Internet in a matter of minutes. You can’t do that with real estate. Buying residential real estate requires contracts, mortgages and inspections.

Did I mention that most folks who buy real estate don’t do so for the sole purpose of investing their money? A family can live in a house. A family cannot live in stocks.

So I’m not sure we need to worry about home prices crashing to the ground.

Here’s where I think Mr. Bernanke might be wrong.

I see what’s going on in the market every day, and it’s crystal clear that the buying frenzy has ebbed.

Let’s look at a real-life example. There are currently about 40 town homes listed for sale in Kingstowne, in Fairfax County near Alexandria. Some of these homes have been on the market for only a week. Others have been on the market for more than three months.

Last spring, you might have found less than a dozen on the market, only to be sold within a few days.

Affordability has finally entered the game. Wages and salaries have not kept up with home prices. When that happens, demand will ease. When demand eases, inventories rise.

It’s classic supply and demand. Decreasing demand coupled with increasing supply cannot equate to increasing prices.

Home prices have already fallen in certain areas of metropolitan Washington. Thanks to a growing population and a stable economy, I think it’s unlikely that home prices will fall considerably. In fact, many areas will continue to appreciate. But I believe the cycle of double-digit appreciation is over for now.

There’s no question that real estate is a good investment over time. Timing is critical if your plan is to dive in for a quick buck.

Henry Savage is president of PMC mortgage in Alexandria. Contact him by

e-mail ([email protected]).

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