Resources: Newsletter Articles:
March, 2005: Bubble? Not In MY Neighborhood!

The pundits have been talking about a 'real estate bubble'. A bubble exists when prices are bid up beyond what is consistent with underlying market fundamentals. Bubbles also have a beginning and an end... remember the dot com crash of 2000? So, is there a bubble? How solid is our real estate market?

Let's talk about some of what has been fueling the concerns.

• The last four years have had record-setting home sales. In 2004, new-home sales rose 14%, resales rose 9.4% (to an all-time high), and the median sale price rose at the fastest pace in 24 years. Since 2000, the Dow Jones U.S. Homes Construction Index has risen 588%.
   
• The average price of a single-family home in the nation increased 9.36% in the one-year period ending in the second quarter of 2004, despite rising interest rates, an inflation rate of 2%, minimal job growth and flat wages. Adjusted for inflation, that home has appreciated in value by 43.59% over the last five years.
   
• As home prices and mortgage rates drive up the cost of fixed-rate mortgages, buyers are shifting to less traditional mortgage products. Adjustable Rate Mortgages now account for over one-third of new mortgages (12% just three years ago); interest-only loans account for another third. The ratio of mortgage debt to home equity is at record highs, and home equity lending is displacing other forms of consumer debt.
   
• The share of the nation's conventional mortgages held or guaranteed by Fannie Mae and Freddie Mac has doubled since 1990, swelling to nearly $4 trillion and a 60% share of that market. According to The Cato Institute's Lawrence White (a former Freddie Mac Board member), "Fannie Mae's and Freddie Mac's specialness is a double-edged sword. On one side, they cause interest rates on many residential mortgages to be lower than would otherwise be the case; on the other, their size and mode of operation have created a significant contingent liability for the federal government and, ultimately, for taxpayers. Their size and prominence has recently led to concerns about the larger consequences for the U.S. economy if either were to experience financial difficulties."
   

Still, even with long-term interest rates on the rise, February sales data show that there was another uptick in home prices in California. Indeed, many economists and industry experts think prices will eventually only taper off, resulting in a so-called "soft landing."

D.J. Grubb, of The Grubb Co., says that home values and prices are determined today on the local level. "There are certainly pockets in which we see excessive home values, but these are typically destination resorts. The luxury market in San Francisco sells for approximately $1200-1400 per square foot; in the East Bay, comparable luxury properties are now selling for approximately $735 per square foot. Median-valued homes in the East Bay are an even better value, at around $400-450 per square foot."

In addition, D.J. adds, "The San Francisco market is comprised of 70% renters and 30% homeowners. There is simply not enough inventory, and the resulting demand overflows into the East Bay... known for our great neighborhoods with strong economic future."

Please call with comments or questions about this article!

Sources: Los Angeles Times, The Cato Institute, CNN/Money, The Washington Spectator.

sherrybenninger@grubbco.com

The GRUBB Co., 1960 Mountain Blvd., Oakland, CA 94611

Top of Page

©
Warning: date() [function.date]: It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected 'America/New_York' for 'EDT/-4.0/DST' instead in /var/www/vhosts/80/240791/webspace/httpdocs/sherrybenninger.com/res_bubble2005.php on line 405
2024 Sherry Benninger. For informational purposes only.
No reprinting of this material is allowed without express written permission.

privacy policy