 - | |
|
|
| User Functions | |
|
Don't have an account yet? Sign up as a New User
|
| |
Ready for the Next (Real Estate) Bubble? |
|
Sunday, May 02 2004 @ 12:43 PM EDT
|
|
 Salim Haji - A bubble is forming in real estate, and when it bursts, the impact on the U.S. economy will be detrimental, significant, and widespread.
As interest rates begin to rise, concern has increased about a potential housing bubble and its effects if it were to burst. As individual investors consider the likelihood and implications of a real estate bubble, three questions have to be addressed: First, does it matter if there is a bubble and it bursts? Second, what is the likelihood that there is indeed a real estate bubble forming? And third, what can be done about it? Each of these questions is addressed in turn below.
Does it matter?
The existence of a real estate bubble matters to individual investors on two levels. First, it matters on the macro-economic level, because the bursting of a property bubble will have a broad detrimental impact on the economy and the stock market. But it also matters on a micro-economic (or household) level, as the bursting of a real estate bubble can significantly hurt the average household balance sheet.
On the macro-economic level, the data is compelling. The International Monetary Fund (IMF) published an in-depth analysis of equity market and real estate crashes in its April 2003 edition of the World Economic Outlook. In this study, it concluded: "Housing price busts were associated with output effects about twice as large as those of equity price busts. The worse case output effects exceeded those of equity price busts by a substantial margin. Moreover, the slowdown after a housing price bust lasted about twice as long." The average real decline in prices in a housing market crash (30% after four years) was found to be less than for a stock market crash (45% decrease in equity prices, on average, after two-and-a-half years), but at the end of each of those periods, GDP (or "output") had fallen 8% after a housing bubble burst compared to 4% after a stock market bubble burst.
Rest of the article.
|
|
|
| Authored by: Anonymous on Monday, May 03 2004 @ 10:16 AM EDT |
Increase in region's median price not best indicator
Dian Hymer
The southern California housing market is hot. So hot, that in January 2004, the median home price in Malibu was up 106.7 percent from a year ago. Did Malibu homeowners actually see the price of their homes double in just one year?
Increases and decreases in home prices are usually quoted in terms of changes in the median home price. The median price doesn't measure actual home-price appreciation. Instead, it is the midway point of sale prices in an area for a given period of time, usually one month or one year. This means that half the homes sold during the period sold for more than the median price and half sold for less.
Malibu home prices surely increased substantially during the last year. But the magnitude of the increase in median home price in Malibu is indicative of a pickup in the upper-end market. Multiple million-dollar properties, which had languished since the recession of 2000, are back in demand.
For years, first-time home buyers, who typically buy less-expensive homes, dominated the home-sale market. When the sale of less-expensive homes outpaces the sale of more-expensive homes, the median home price stays relatively low. In 2003, trade-up buyers accounted for 70 percent of the home sales in California, according to the California Association of Realtors. Trade-up buyers purchase more-expensive homes. When there is an increase in the sales of more-expensive homes relative to the sales of less-expensive homes, the median price increases.
A 10 percent increase in the median price doesn't necessarily mean that your home appreciated 10 percent. It could have appreciated more or less than that. It's difficult to measure absolute home-price appreciation. For one thing, you can find different rates of appreciation within one market. For example, from 2000 through 2002, the low end of the market appreciated in most places, while the upper-end market prices actually dropped in some areas during that time.
One measure of home-price appreciation uses refinances to gauge price increases and decreases. This measure is inaccurate at best. Last year, an Oakland, Calif., homeowner's home appraised for a refinance at $870,000. This year, the same house appraised for $830,000. The only change during the intervening time period is that homes in the areas appreciated about 10 percent.
Rest of the article.
[ Reply to This ]
|
|
|
|
|
