The Housing Bubble

Is anyone buying this garbage? I have a cousin in real estate in Southern California, and I recently apologized to him that the appreciation rate out there was going to dip below 30%. Of course I was kidding, but what's so bad about a more stable 15% appreciation rate or 20% or 8%? My question is, what constitutes a true burst of the real estate bubble? A slowing of uncanny appreciation does not. Sure, many will look back at the last five years as the "golden era" of real estate, but in the context of the more expensive financing costs of the previous three decades, it is ridiculous to assume the sky is falling. The cost of home loans remains quite low, and there's little reason to believe that rates will all of a sudden explode upwards of 7% for a 30-year fixed rate mortgage. Even if they do, 7% rates were all the rage at the beginning of the decade & began the home refinance boom. It's still "cheap" money.

I heard a humorous AP report yesterday that housing starts (new construction) decreased by a shade above 5.5% last month. Does this mean the real estate market is doomed? I don't believe so. My response is it's about time. I think some builders will have difficulty selling off their inventory in a relatively short period of time, but this result has more to do with the viability of the building project in an optimal market as opposed to interest rates meandering into the low sixes. Some projects will see longer marketing times, however, such projects probably wouldn't have flown off the shelf even with sub-6% interest rates.

Without question the market is softening, and listings of pre-existing homes are starting to creep upward. This, however, does not signal the end of good returns provided the product being offered is legitimate. In other words, some sellers won't like the return they get because they are used to realizing a certain percentage for substandard quality of work, but in all honesty we reap what we sow. A year ago investors pushed crap, and a willing & able public scooped it up like roses. Now, it's not as easy to make a buck. All in all, this is not bad news for the fairly educated consumer.

The Louisville market in particular has seen some record gains, however, unlike red hot markets such as California & Las Vegas, the discrepancy between gains a year ago & those of today won't feel like much of a difference in the pocket book. The local newspaper, The Courier-Journal, just did a story on the high end home market in Louisville and the recent influx of listings above $1 Million in the market. The article does a fair job of discussing the reasons this segment of the market will likely fill its inventory & experience some difficulty in unloading it. It's a new "problem" in a market that is unaccustomed to this level of pricing. Despite the increased inventory of high end homes, it's not likely that sellers will shy away pricing homes in the million dollar range. The market will do its job in assessing value, and some sellers will be required to lower their prices or stubbornly wait out an accepting buyer.