Bubble Pops Up In Housing Market

By: Ellen Crean

Just drop in to a neighborhood gathering or cocktail party, and someone is bound to be talking about housing prices. Financial adviser Ray Martin can tell you why, here as well as in his regular appearance on The Early Show.

The ever-higher level of housing prices is a hot topic. With almost 70 percent of households now owning their homes, there are a lot of people out there talking about it.

According to the National Association of Realtors, home prices rose last year more than 8.3 percent nationally, and suddenly it feels like the real estate selling season this year will be a repeat of the year before, and the year before, etc.

The questions people are asking include, "Will it last?" and, "Is there a housing price bubble?" There appears to be no shortage of experts who agree that, although real estate prices have grown considerably, home prices are not likely to fall in the spectacular fashion that the stock market did in 2000.

The consensus is that real estate prices will likely grow, but at a slower pace, not at the annual double-digit percentage growth experienced since 1997.

The arguments that real estate and home prices will continue to rise indefinitely include a lack of available land, low interest rates and a never-ending supply of baby boomers and foreign buyers stepping into the market.

People who have forsaken their traditional line of work to seek their fortunes flipping real estate chide seasoned experts for not understanding the "new paradigm" in real estate. After all, they assert, people shouldn't be concerned over what they pay for a home, because home prices will always go up. And if home prices always go up, what you pay now doesn't matter anymore. These were the same points used to explain the nosebleed levels of the stock market in the late 1990s, and we all know how that story ended.

Price mania for any item can almost always be marked when the subject is a conversation topic at home, at gatherings and, yes, in the media.

So what's the answer? Will house prices continue to rise, or will the home price boom that began in earnest in 1997 turn into a bust?

According to Yale University economist Robert Shiller, the answer is: Be prepared for some shaking out.

According to Professor Shiller, he gathered a series of data on housing prices that go back 115 years, and the result was surprising: The U.S. has never experienced a home-price bubble like the one that began in 1997, except for the period right after World War II, when soldiers came home and went on a home-buying spree. His data also suggests that home prices generally appreciate about one percentage point above long-term inflation.

Signs of an overheated real estate market include the increasing number of buyers using interest-only and negative amortization mortgages to finance nosebleed high purchase prices, counting on future appreciation to build their equity. Also, according to the National Association of Realtors, about 25 percent of homes purchased last year were bought as investments, not as primary residences.

Potential trouble spots are in markets that have had double- and triple-digit price increases over the past five years, such as:

Boston, Mass.: 44 percent

San Francisco, Calif.: 78 percent

New York, N.Y.: 94 percent

Washington, D.C.: 97 percent

Las Vegas, Nev.: 103 percent

Miami, Fla.: 105 percent

Los Angeles, Calif.: 118 percent

San Diego, Calif.: 137 percent

Sources: National Association of Realtors (NAR), Bureau of Labor Statistics (BLS) and National Association of Home Builders (NAHB)