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Housing Bubble?

29 August 2005
By Kurtis Parisi

"From Boston to San Diego to Washington, D.C., there are signs that the red-hot housing market may be cooling," the Journal reported on Aug. 17. "The number of listings is up, sales are down and more sellers are being forced to trim prices or offer incentives to entice buyers."

This is ominous news from the Wall Street Journal, but are we in a bubble? Before you panic, drop your price, and quit the refinance, let’s take a quick look at the statistics that make this “bubble” different than the recession bearing market disasters of the past.

First - Housing prices are affected dramatically by geographic markets. While Rhode Island has seen an 85% gain over the last five years, New Mexico has actually dropped in price. The national increase for that period was just under 40%. The “bubble” appears to be a geographically diverse phenomenon.

So, what are the implications? Geographic changes mean that while the bubble may burst in some markets, others may be completely unaffected. It also means there is very small chance for a market turn to create a nationwide economic recession.

Secondly – The economy is growing at a steady (if slow) rate and inflation is not a significant problem with the economy. The cost of labor and materials for home building has not risen at a rate above the rest of the economy pointing to a different reason for the price gain.

Land. In the 1950’s the average value of land that a home was built upon was around 15% of its total value. In today’s market it’s nearing 40%. The driving force behind the housing boom isn’t the houses at all. Spend a little time shopping around and you will quickly find the price of undeveloped land has risen substantially (especially here in Rhode Island – don’t forget, we’re a little state with a lot of people). With the continued trends of zoning, open space, and increasing populations the demand for land does not appear to be in danger of disappearing.

It does not appear that the housing bubble will end with a “burst”. It may soon deflate, but not in the catastrophic way some of the so called “experts” predict. When it does deflate some groups of homeowners will be affected. Those being stretched by new mortgages on interest only loans who are forcing their financial boundaries may end up in dire circumstances. But for the rest of us, a house is still the biggest and best investment you may ever make.

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