Realty Investors
Is there a Real Estate Bubble?
By John Kavazanjian

Is There a Real Estate Bubble?

This question has been extensively debated by experts over the last four years as home prices in some areas of the country appreciated by 20-35% while some areas have not experienced growth, and in fact have declined.

Here in Florida we recently have had a shift in the market in inventory; however prices have not declined proportionally yet to the increase in inventory.

“Florida's housing market shows price gains in January”

“ORLANDO, Fla. -- Feb. 28, 2006 -- Coming off several years of blistering home sales at a record pace, Florida's housing sector followed the national trend in January and showed signs of some market adjustments, according to the Florida Association of Realtors® (FAR). Still, the statewide median sales price for existing single-family homes last month rose 21 percent to $248,600; a year ago, it was $205,100.

Housing industry analysts nationwide noted it may take a while for home price growth to cool, following a long period of short supply and sellers accustomed to exceptional price gains. In January 2001, the statewide median sales price for single-family homes was $115,800, which means a gain of about 114.6 percent over the five-year-period, according to FAR records. Realtors from across the state report that more homes are available for sale, improving what had been tight inventories in many markets. Statewide, sales of single-family existing homes totaled 12,815 in January compared to 15,745 homes sold a year ago for a 19 percent decrease.”


Webster’s Dictionary defines a bubble as: a : something that lacks firmness, solidity, or reality b : a delusive scheme

A typical bubble scenario, was the January 1999 to January 2001, rapid rise and fall of the stock market due to rampant speculation and prices that had no relationship to earnings or return on investment. Alan Greenspan described it best when he called it “Irrational Exuberance”.

The estimated United State population as of June 2005 was 295,734,134 and steadily growing. Those individuals and families must have homes and shelter and while the population is growing the amount of land is stagnant.

Let’s face it, real estate is an “Economic Market” and as such, conforms to the basic laws of supply and demand and markets correct themselves in cycles. However, if you look at the history of real estate over time the long term prices has always risen.

Beyond the growth in population, the scarcity of land as well as the increased cost of petroleum over the last 10 years has fueled the price increase of every material used in construction, driving new home construction prices to record levels. At the same time the cost of borrowing mortgage money, still at 40 year lows, and the increased competition of sources offering mortgage loans has caused and the more creatitive financing making loans easier to obtain.

These are the factors that have driven the appreciation to record high levels in certain markets.

While the Federal Reserve has been steadily raising the Fed Prime Rate the cost of mortgage money has not risen proportionally, however over the last 12 months we have seen the rates begin to increase and the lenders are beginning to be more restrictive in their lending policies.

As prices have risen the buyer’s ability to absorb the percentage of higher mortgage payments vs. income does affect the demand side of the market. Higher mortgage interest rates can have an additional impact.


Here is a recent except from a recent National Association of Realtors report:


“NAR: Housing market readjusting to normal balance”
“WASHINGTON -- March 14, 2006 -- A lower level of home sales expected this year will create a more level playing field for buyers and sellers on the heels of a five-year sellers’ market, according to the National Association of Realtors® (NAR).
David Lereah, NAR’s chief economist, says the number of homes on the market has been improving nicely. "The cooling from overheated sales conditions in recent months is helping to bring inventory levels up to the point where buyers have more choices than they’ve seen in the last five years," Lereah says. "Annual price appreciation is still running at double-digit rates, but the cause of those sharp increases is going away. As the market readjusts, price appreciation should return to more normal rates of growth this year."
The national median existing-home price for all housing types is projected to rise 5.8 percent in 2006 to $220,300. The median new-home price should increase 5.4 percent this year to $250,200.
Existing-home sales are expected to fall 5.7 percent to 6.67 million in 2006 from the record 7.08 million last year. At the same time, new-home sales are forecast to decline 7.7 percent to 1.18 million from a record 1.28 million in 2005 -- each sector would be at the third highest year following the tallies for 2005 and 2004. Housing starts are likely to total 1.98 million this year, down 4.3 percent from 2.06 million in 2005.”

Yes we have seen more inventory come to market in the last few months and yes we have seen sellers make price adjustments when they have over inflated the selling price of their homes and yes we have seen a drop in sales in recent months. This is the result of the market correcting itself and I believe we will get back to a more normal appreciation growth of 3-8%.


Is it a bubble? No the fact that 300,000,000 people need a place to live and 77,000,000 baby boomers will be reaching retirement age and want more to warmer climates are the factors that will keep the market demand for property and consequentially the prices from dramatically falling or collapsing the prices in my opinion.

Investment follows opportunity and as the market changes you need a Real Estate professional to professionally assist you in executing your residential/commercial property buying or selling decisions.

I am here to help you.


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