Will the Bubble Burst
Right After You Buy?
Question: My wife and I want to buy a home, but this is a huge investment for us and we can't afford to take a loss. We keep reading about the possible bursting of the real-estate "bubble." If this happens, will it be like the stock market, where prices fell virtually overnight?
-- Leon, San Jose, Calif.
Leon: There is an old rule that says, "That which goes up must also come down." It probably holds for most things, including real estate. So the real question, of course, is when will this happen?
While I don't have a crystal ball, my guess is that the real-estate market is going to keep rolling along as it recently has -- at least for a while. Right now the big increase in home prices around the country is being fed by at least four different sources:
Low interest rates: More people than ever can afford the financing to buy homes. With interest rates below 7%, there is a huge pool of potential borrowers/buyers out there. This pool will remain unless rates go up. Even then, rates would probably have to exceed 9% before they would exert a strong cooling influence on the market.
New types of financing: As recently as three to five years ago, buyers typically needed to make a 10% down payment to purchase most homes. But today buyers with good credit histories can put almost nothing down. Some loans will even cover a portion of the closing costs!
Housing shortage: In spite of what economists have been saying, there is a shortage of good housing stock in many areas of the country. This can be seen in the inventory of unsold homes, which is nearing an all-time low. In some areas there is only a 30- to 45-day supply. The simultaneous increase in home prices and apartment rents is more proof of this fact. If there were a housing balance, apartment rates would fall as housing sales rose (with apartment dwellers moving to homes, leaving an oversupply of rental units).
Lack of alternative investments: Investors aren't stupid. You can make money today investing in real estate. Can the same be said for stocks or bonds? Money stuck in savings accounts and certificates of deposit earns a pitiful return, too, leaving investors with few good options.
Of course there are wild cards. Another terrorist attack in the U.S. could have widespread and unforeseen economic consequences. The meltdown of the U.S. dollar could cause a world-wide recession. War in the Middle East or Asia could have strong repercussions. And something totally unexpected could jump out of left field. But unlike investing elsewhere, you can usually either live in or rent out your real-estate investment.
-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).
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