- The Washington Times - Thursday, October 20, 2005

Start up a discussion with almost anyone these days and soon it turns to real estate. Very soon after that it turns to the question: When’s the bubble going to burst?

The challenge with talking about a bubble so much is that it can become a self-fulfilling prophecy for consumers.

There are plenty of naysayers about the real estate market and its unprecedented growth. Las Vegas-based ReviewJournal.com, for instance, is posting a report by Doug Fabian, president of Fabian Wealth Strategies (www.Fabian.com), and Josh Lewis, first vice president at Santa Ana, Calif.-based Stearns Lending.

The report, “Boom to Bust,” lists the following issues about current homeownership as pointing to a possible bubble:

• More than 25 percent of all homes are now bought by people who don’t plan to occupy the property.

m Households are allocating a greater percentage of income to housing than ever before.

m More houses are being purchased with no down payment. People are buying primarily because of the expectation of appreciation.

• The majority of today’s loans involve some combination of adjustable-rate mortgages, interest-only or negative amortization.

The report says, “This layered risk will result in a major increase in foreclosures, which will bring the total housing market down in value.”

Unfortunately, this report brings up nothing new. People have been buying real estate for decades in anticipation of appreciation. Also, during those years, households have been allocating a greater percentage of income to housing. Zero-percent down-payment mortgages have been around for just as long.

All of these factors have been true for the last 20 years.

Compare this list to the second quarter 2005 report issued by the U.S. Department of Housing and Urban Development on U.S. Housing Market Conditions. You’ll see a different picture:

• The housing sector continued to be a major contributor to the U.S. economy during the second quarter of 2005.

• New records were set for single-family permits, new home sales, and existing home sales.

• Interest rates remained at less than 6 percent, but the challenge to affordability for new home buyers grew.

• Compared to the most recent quarter, the median sales price of an existing home rose by 10.3 percent, and was 13.7 percent higher than a year earlier.

• Compared to the second quarter of 2004, permits for new homes were up 2.1 percent; construction starts were up 4.6 percent; and new housing completions increased by 4.7 percent.

• Sales of existing homes and new single-family units rose, by 4.6 percent and 10.2 percent respectively.

• Permits and new starts for multifamily units slowed after the first quarter of 2005, but remained stronger than in the second quarter of 2004.

So why all this good news on the housing front? Basically, the economy is growing. And that, my friends, is why you have to second guess the concept of a bubble in the real estate market.

We’ve become accustomed to the “bubble” idea because of 2001 drop in the stock market, following a period of unprecedented growth.

The difference is that the stock bubble was based on the founding of companies on investment in hopes of finding the next Internet-based fortune rather than the actual production of consumer products.

The inflation we are seeing in the housing market is because of economic growth, more jobs, population growth and the local jurisdictions not providing enough housing for this growth.

It’s pretty simple. If you grow the economy, you must grow the housing base.

However, in the last five years, metropolitan regions have taken the slow-growth or limited-growth approach to providing housing instead of pushing for more affordable housing in high-density projects.

When the economy slows in any given jurisdiction, you’ll see trouble in your real estate market.

For instance, the Washington area, home to the hottest employment growth in the country, is projected to create more than 82,000 jobs in 2005, according to the Center for Regional Analysis at George Mason University (www.cra-gmu.org). However, the center points out that local builders are only allowed to put up about 35,000 houses per year.

If you’re bringing more than 50,000 new jobs into an area every year, but only build 30,000 houses, is that a bubble or a true reflection of the supply and demand of housing? You be the judge.

M. Anthony Carr has written about real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Got a personal real estate issue? Post questions or comments at his Web log: (https://commonsenserealestate.blogspot.com).


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