Has the Bubble
Finally Burst?

Question: I'm living in a suburb of Los Angeles, and I've been holding off selling my home until prices peaked. Over the last year, I've watched nearby houses sell within days for astounding prices. But recently, I've noticed homes sitting without selling. I talked with an agent who said the inventory is growing. Has the bubble burst?  Did I wait too long to sell?

-- Gloria, Valley Village, Calif.

Gloria: Indeed, the cream seems to be off the milk, at least in Los Angeles, and apparently in other parts of the country as well. While last year residential sales prices in L.A. increased 25% or more in most areas, since late summer prices have fallen.

This has caused many people to ask if the real-estate bubble, like the dot-com bubble before it, has burst? Instead of continuing upward, are prices now turning around and heading lower?

I don't think so. While I certainly don't have a crystal ball, I think that what we're seeing is a momentary cooling-off period from a very hot market.  It's likely not a burst, but a pause.

The reason is that the fundamental picture hasn't changed. There is an enormous housing shortage in California and in many other parts of the country. By some estimates we're hundreds of thousands of new homes short every year. The fact is that we never have caught up with demand after the housing recession of the early 1990s.

Perhaps you remember that period? A recession and unemployment caused many people to pull back from home buying. Builders across the country were forced into bankruptcy as new tracts of hundreds, sometimes thousands of properties went unsold. Auctions became quite common as desperate builders attempted to get rid of their stock of homes.

In response, instead of building huge tracts, today's builders tend to build in much smaller numbers. And they prefer to have the homes sold before they actually start construction. On the other hand, immigration and expanding families are demanding ever more homes. This supply/demand imbalance, in fact, is what has pushed prices so high.

Of course, a growing economy and continuing low interest rates have helped as well. But until the fundamentals change, I don't think we're likely to see a new recession in housing. Indeed, most agents are predicting a 9% to 11% price increase for most of L.A. for next year. That's extremely robust when compared to any but the last year or two.

Yes, if you want to sell today, it's unlikely your home will move within days. It may even take a few months to find a buyer. But that's usually called a "normal" market.

-- 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 books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).

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