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There is no real estate bubblewritten - 06/28/2005 A bubble is more than just high prices. A bubble means prices are so high that at any moment, they can collapse or at least have a long way to fall. If we were to define a bubble, we may want to say prices are at least double what they should be. And often they go much higher than that. Think of Cisco in January 2001, the stock traded at 100. Now in 2005, four years later, that stock sits just below 20. Thus, cisco was overvalued by more than five times its appropriate value. Some stocks were even worse. CMGI peaked at 200 and now sits at 2. Thus it was overvalued by 100 times! Now that is a bubble! Another tell tale sign of a bubble are the ridiculous comparison stories. For example, Amazon.com was worth more than all book stores combined, PriceLine.com was valued more than all the airlines for which it sold tickets combined. In Japan in 1990 all the land in Japan which is about the size of California was worth more than all the land in the United States. In fact, I lived in Japan in 1990 during its real estate bubble and remember I had two good friends with family homes in great locations that were only about 1000 square feet but sold for 2 million dollars. In the US right now a comparable house would sell for maybe $500,000. But comparing to the US in 1990, that home may have sold for about $200,000. Thus the market was over valued by about ten times. Again, that is a bubble. Compare these bubble examples to real estate prices in the US right now. How much can you earn from rent compared to how much you could earn by selling your house and investing in stocks or bonds? Often the return on real estate from rent is about 5% a year. Not great, but not that bad and certainly not a bubble. One of the reasons for the real estate boom has been low interest rates. Thus, when the federal reserve started raising rates one year ago, everyone feared mortgage rates would rise and real estate would suffer. Instead we have seen home sales stay strong and despite rising short term rates, long term rates remain low. It seems the Fed is close to stopping or slowing down in raising short term rates, thus there will be even less pressure on long term rates. I am not so bold as to say housing prices will continue to rise. In fact, they may even decline, but the current real estate market is not a bubble! The current real estate market is at worst, expensive with no room to grow, but it is by no means a bubble ready to burst. We love Feedback - Let us know what you think. |  | | | |