Bursting the Bubble Myth

Friday, July 29th, 2005

Bruce Benham, Chief Operating Officer of RE/MAX International, Inc.

We’re all aware of the dramatic headlines proclaiming the inevitable “housing bubble” that will reportedly cripple the real estate industry, and the entire U.S. economy, when it eventually bursts.

But you know better. And I hope your clients do too.

The alleged bubble, rooted in fears created during the dot-com aftermath of the early 2000s, is a media-manufactured myth. It’s based on the projected collapse of a national housing market that simply doesn’t exist.

It’s a misnomer

My position matches that of U.S. Treasury Secretary John Snow, who offered his in an interview on Bloomberg Radio April 26th.

“I don’t think the evidence suggests there is a national housing bubble at all,” Snow said. “Housing prices are high in some markets but those markets are supported by underlying demand and supply considerations. It’s really a misnomer, I think, to talk about bubbles in the sense that you get a stock market bubble or a bubble in the commodity markets.”

Part of the bubble premise is that prices have escalated to a point where homeownership is unreachable for most families. But that’s clearly not the case; people are buy­ing and selling homes at an unprecedented pace. According to the National Association of Realtors®, March 2005 generated the third-highest seasonally adjusted annual rate of existing home sales in history. The only two months topping March’s rate of 6.89 million homes were June 2004 (7.02 million) and November 2004 (6.98 million).

Home sales remain strong despite changes in price.

“We still have more buyers than sellers in most parts of the country,” David Lereah, NAR’s chief economist, said in late April. “There is a strong demand for housing from a growing population.”

Second home flurry

Demand is fueled by many factors, including a constant influx of immigrant fami­lies as well as affluent baby boomers purchasing second homes as they approach re­tirement. NAR’s 2005 “Profile of Second-Home Buyers” reported that second homes accounted for 38 per cent of the existing housing stock and 36 per cent of all homes purchased in 2004. What’s more, many in this massive group of 75 million people have the wealth – much of it generated through the ap­preciation of the long held homes in which they raised their families – to help their children enter the housing market.

These purchases are financed by mortgage rates that may seem high com­pared to a year ago, but remain extremely attractive by the standards of past decades. While bubble theorists point to the Federal Reserve’s 2004 benchmark rate increases as a sign of hard times to come, you’d sound fairly ridiculous explaining the dangers of a six per cent rate to a time-traveling homeowner from the early 1980s who paid 16 per cent on his or her mortgage. According to Freddie Mac chief economist, Frank Nothaft, only one in seven current mortgages carries a rate above seven per cent, so even if fairly significant hikes emerge down the road, the current lending climate continues to be a boon, and not a strain, for today’s homeowners.

It’s no secret that prices in many markets have grown quite high. And those markets may soften as local supply catches up with demand. But is that the same as a “housing bubble”? To me, the word “bubble” goes far beyond reality, evoking thoughts of the Nasdaq stock exchange losing 60 per cent of its value. Does anyone really think housing – in any market – is going to lose 60 per cent of its value?


A local issue

The prices in one state, of course, are not tied to those in others. Real estate remains a local concern, with activity and price fluctuations driven much more by variances in demand than on what’s happening in a faraway state or a non-existent “national market.” It’s our job to educate clients that despite what they read and hear about skyrocketing prices in California or Florida, their situation ultimately boils down to the prices of homes bought and sold in their own neighbourhood.

The media focus on the ex­tremes. The bubbleologists’ favourite example is San Francisco, where the 2004 median price climbed above $629,000. But while many other cities have experienced similar multiyear climbs, the median price in most remains under $200,000.

Do higher-than-before values put homeowners in peril? If they’ve taken a prudent buy-and-hold approach and lived in their homes for any length of time, probably not. Even if their local market softens, most homeowners still benefit greatly from their decision to buy, despite any price-related anxiety they felt when they made their purchase.

Current conditions simply underscore the fact that buy­ing a home remains one of the smartest, surest things a family can do to enhance its present and secure its future.

And that, in the face of all the media’s bubble-based hand wringing, is what we can, and should, point out to our clients, colleagues and friends.

Reprinted by permission of the Publisher of The REAL ESTATE PROFESSIONAL, May/June 2005 edition. ©Copyright. All rights reserved.


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