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A USA perspective, Is the real estate bubble about to burst?

Many marketplaces across the country have cooled from the phenomenal pace we saw in the spring and summer of 2004. We have seen a shifting away from a crazy seller’s marketplace with multiple offers to a saner seller’s market or neutral market.

This has caused the talk to intensify about a housing bubble. It has caused fears of buyers not wanting to purchase at the top of the marketplace. They fear the bubble might burst.

Fortune Magazine, in an issue in the fall of 2004, announced on the cover, “The bubble is going to pop”. The real facts of the national or even regional marketplace do not reflect that conclusion.

Markets are throttling back from the insane level. That’s hardly a reason to run around expecting the sky to fall! The only thing that could dramatically influence housing prices into retreat in a major downward movement is the national economy. There is no indication of a regional or national recession in the foreseeable future. The economy is continuing to grow at a brisk pace even though the job creation has lagged behind projections and the US dollar has lost value. The Gross Domestic Product is on very solid ground.

The other factors why we will be experiencing growth is summed up best by the law of supply and demand. When demand is high for a product with limited supply the price will increase. The housing in most markets reflects that reality.

The demand for new homes continues to grow nationally in the face of light supply. Regulatory restrictions on development of new homes have increased the difficulty of producing housing units for consumers. The red tape and time to bring new lots and homes to the marketplace has increased exponentially. Because of carrying costs and development costs only the largest and most substantial builder/developers can compete in many of the major metropolitan markets nationally. The supply and demand for new homes is liable to remain out of balance for some time. This also helps influence the resale marketplace.

The demand for homes is increasing because of the influx of newcomers to the United States. According to the Census Bureau, immigrants are boosting the population by 1.3 million annually bringing our total increase to over 2.8 million annually. This is one of the key reasons we saw over 7 million homes sold in 2003, up from over 3 million just 25 year ago.

The Harvard University’s Joint Center For Housing Studies projects record increases in demand for the next ten years. They project the supply of homes in the United States will need to increase by 10% annually to accommodate the number of new households being formed.

There are two segments of the marketplace that are driving those numbers beyond our immigration and birth rate.

1. Single women have made an entrance into the housing market. This has developed significantly in the last ten years. These single women are a growing niche of the marketplace. They are purchasing homes before marriage or replacement of a residence after a divorce. Both trends continue to accelerate.

2. The baby boomers dramatic increase in second home purchases. In the next ten years the boomers will explode the second home marketplace. The resort communities will be most affected by this trend.

Some of the bubble naysayers are attaching their theories to the heavy debt of consumers. They feel consumer debt will cause the bubble to burst. They are correct when they say that American consumers are at record debt levels.

Residential mortgage debt has ballooned to 8 trillion today from 5.6 trillion in 2004. The balance is the mortgage rates are at 30-year lows. The monthly mortgage payment, as a percent of incomë, has dropped sharply to 18% of household incomë. This is a significant reduction from the average of 22% in the 1990’s and 30% in the “go go” 1980’s.

Interest rates will rise in 2005. The Fed, led by Greenspan, has already raised them five times since June of 2004. Albert Wojnilower, recognized interest rate predictor, forecasts the interest rates for long-term mortgages to be 7% to 7.5% by fall of 2005.

For some buyers this will have little or no effect on their ability to purchase a home. For others, even this type of an upward movement will price them out of the marketplace. It is time for us to be prepared to educate our buyers on acting now. To convert, commit and educate our buyers in how they need to respond to the dynamics in the marketplace.

There is no questíon the marketplace nationally will continue to move to a neutral marketplace in 2005. The talk of a bubble burst is merely what the balloon if filled with...a lot of hot air!

Written by Dirk Zeller, Real Estate Champions

If you would like to discuss issues like this or other questions you may have, please email me at anytime .

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