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Froth or Bubble?? Will Housing POP??

Thursday, June 30, 2005 posted by Tommi Crow

Is there froth in the housing market? 66 U.S. metro areas had double digit price apprecation in the last 12 months. Does that mean that there are 66 market bubbles inflated with “irrational exuberance”. No, not at all.

Housing is a spot market. In areas like Manhattan, property averaged $800 per square foot in 2001. In 2005, Big Apple prices are averaging $1700 per square foot. San Diego saw prices increase at around 34% last year and 2005 is shaping up to be close to the same. Pockets of S. Florida are becoming very expensive and the market is becoming very over built, especially for condo’s and multifamily. California’s median home price stands at $523,150 this year, already up 16% from 2004.

Is there a housing bubble? Conversely, in Arkansas prices averaged about $60 per square foot in 2001 and are hovering at around $65 presently. You can buy a mansion in Texas for $100 per foot today. Housing is very regional by its nature and if your area has not become insane by a common sense approach, don’t worry about it.

So, is housing in your town a risky buy at these levels? It depends. Can you rent the same unit for less than half the monthly price of buying it? If so, rent. Is risky financing the norm in your area? Did your neighbor buy their home with no money down, no qualifing and an interest only balloon note? If so, consider taking your profit off the table. If housing feels a little over done to you, do not buy, if it is not the home you will live in. Leave the speculation to the others and buy only what you can afford and still enjoy your life.

Remember in real estate or stocks… bulls and bears get rich. Pigs get slaughtered. Buying high is OK because someone will buy Higher. Buying Higher is OK, because someone will buy Highest. But, if you buy Highest, you’re the one left holding the bag with no one else to sell to.

I sold, and unfortunately, owned real estate throughout the 1980’s in the Dallas, TX area. In the early 80’s house prices raised dramatically, financing was insane and construction quality was horrible. Only 60 months later, in the mid-80’s, entire blocks of housing set empty and vandelized. Lenders would do anything to dump their REO’s. Homeowners were foreclosed upon by the thousands and home sellers went to the closing table with thousands to avoid forclosure. Take it from some painful experience, housing can definitely crash, but is crashing a certainty?

Maybe you can identify where your housing market is positioned by watching a few indicators the economists don’t look at. If you hear the word “flipper” more than twice a day, you might be at the top; if cab drivers and wait staff talk about highly leveraged mortgages, you might be at the top; if your local real estate board had 500 members last year and has 750 this year, you might be in a feeding freenzy; if a “friend” bought a property for $1.2 million and immediately put it back on the market at $1.5 million, you might try to locate your nearest exit; In other words, if it sounds too good to be true…it is. In hot markets, Buy a home, not a deal.