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Real Estate Bubble? Does It Exist And What Does It Mean?

1767 words - 7 pages

A bubble can be defined as "a price level that is much higher than warranted by the fundamentals" (dictionary.com). These bubbles occur when prices continue to rise for no other reason than investors believe these investments will continue to rise in value and subsequently be sold at even higher prices. There has been much debate for the past few years as to whether a bubble exists in the real estate market or if the market simply exhibits strong fundamentals. There have been countless books published on how to make money by investing in real estate and flipping properties, with only one published on "How to Profit from the Coming Real Estate Bust". Upcoming price corrections in the real estate market will have an impact on the entire economy as financial institutions become in danger of credit risks.When the word bubble is mentioned the majority of people think of technology stocks in the late 1990's. Stocks are the perfect example of bubbles, as the underlying companies can be valued and therefore the stocks can be valued. As prices for technology stocks soared in the late 90's the analysts, who were paid to recommend investments through valuation techniques and fundamentals, suggested that these valuations did not apply to technology stocks. The truth surprised the majority of investors as the turn of the century popped this particular bubble. The fact that some of these companies were being valued as if they would grow to represent thirty percent of the U.S. Gross Domestic Product within ten years should have been a warning sign to investors. The economy moves in cycles as evidenced by stock markets, business activity, and even real estate. The difficulty though comes with identifying and valuing the fundamentals of real estate. The role real estate has played in economic growth is clear in recent years, with the danger of a bust not just in real estate prices but rather the possibility of that bust sending the economy into a recession.The recent appreciation is amazingly high with home prices growing more than 12.5 percent in the first quarter of this year alone (Hall). Between 1998 and 2003, according to the National Association of Realtors, the median price of a single-family home in San Diego, California, increased from $207,000 to $425,000 (aier.org). As of March 2005 the median price of a single-family home in San Diego was $530,000 (sdhc.net). There is an argument being made that the growth in real estate prices is being driven by a growth in jobs as well as salaries. The fact though is that in areas such as San Diego where the prices doubled in just four years, salaries have only increased 10.4 percent (sdhc.net). With only 11 percent of households able to purchase the median priced home, around 29 percent of residents are considering moving out of the state because of housing costs (sdhc.net). This high appreciation rates seem unsustainable in many of today's 'hot markets'. While these local hot spots are the extremes, there are a...

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