Bubble trouble?
The red-hot housing market reminds some of the latter days of the 1990s stock market. How will it end?
Ken Wu and Alan Koder figure they got in just in time. Eager to buy their first homes before skyrocketing real-estate values in San Diego priced them out of the market, two years ago the friends each bought houses in up-and-coming neighborhoods.
"All I could afford was a fixer-upper," Wu, 31, says of the modest 1,500-square-foot house he purchased near downtown for $360,000 in 2002. "It seemed like a ridiculous price. But I figured if I did a little work on it, I could add value."
The sweat equity he put into painting it, installing a skylight, and replacing rotted flooring surely helped. But the real bang for his buck came not from his efforts but from those of a flood of buyers who followed in his footsteps. In a similar rush to get in before prices--and interest rates--increased, they were part of a buying frenzy that has since bid up the price of San Diego real estate by about 50 percent in just two years. "It's pretty amazing," says Wu, a financial analyst, of the $550,000 he believes his home would now fetch. "I thought I was buying at the top of the market, but there are houses just down the street that people are flipping for even more."
Koder hasn't done so badly, either. "I figure my place is worth about $500,000 now," the 27-year-old biologist says of the $330,000 suburban house he bought with a 10 percent down payment and an adjustable-rate mortgage, giving him a total two-year return on his money of more than 500 percent, at least on paper. "I always knew real estate was a good investment. I just didn't know it was this good."
Convinced there is more money to be made, last summer the two formed a real-estate-investment club with another friend and purchased a pair of condominiums in Las Vegas--their favorite gambling spot--for about $125,000 each. The rent they receive doesn't quite cover the mortgage payments. But they figure their real-estate gamble has already paid off "because the market there is just exploding," says Koder, who estimates that the condos have already increased in value by as much as $30,000 each. "We were figuring on about 8 percent appreciation a year, but I bet it'll be more."
Such outsize expectations hardly seem out of line these days. After one of the broadest and longest run-ups in housing prices ever, most homeowners are sitting pretty. But there is a growing angst about how much longer the party can go on. Those who believe housing is now the new "bubble," much like the '90s stock market, point to slowing sales and rising interest rates amid nosebleed prices that have far outpaced growth in personal income. Take Las Vegas, for example, where the median home price has increased an eye-popping 54 percent in the past 12 months alone.
And while much of the middle of the country has enjoyed far more modest gains, red-hot coastal markets in California and the Boston-to-Washington, D.C., corridor, as well as in southeast Florida, have pushed up the national median sales price by more than 7 percent in the past year, three times faster than household income.
advertisement
