Real Estate Investing

Bubble starts to appear
9-17-04

It appears the speculation mania that caused the stock market crash during the late 1990s has moved into the real estate market lately.  Well, the real estate market would not crash like the stock market because people have to live in homes but the speculative frenzy that one cannot loose money in the real estate market is very similar to the momentum investing that anybody can make easy money during the stock market bubble only four years ago.

Some of the facts that support the bubble theory are:

- The difference between home prices and personal income and job growth is largest in history.

- Americans borrowed against their homes for about $660 billion in equity loans since 2001.  This activity has been fueling the economy growth which is now winding down materially.

- During the housing boom, rents did not go up but actually went down (rents are to houses as earnings are to stocks) and the rental market is extremely weak.

- As low interest rates fueled the housing boom, now the interest rates are started to move up.

- Very popular adjustable interest rates that helped low income earners to buy ever increasing homes and rapid rising of property taxes will burden many homeowners for foreclosures if the interest rates go up rapidly.

- The U.S. job market has not been strong enough to match the growth in housing prices.

Well, it is impossible to predict when the bubble will burst as many stock investors called the stock investing "irrational exuberance" more than 2 years before the 2000 crash.  The mortgage rates are still low when compared to the historical average rate of about 9%.  Nevertheless, it seems risky to think that you can make easy money to invest in houses as the widespread frenzy that has triggered a speculative buying by amateur investors.  

In the early 1990s slump, a major city lost more than 20% of its value.  Considering the baby boomers, the value of houses may not go down significantly but may stall for several years as a part of a real estate cycle that comes and goes every 10 to 20 years.

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