Bubble trouble?
The red-hot housing market reminds some of the latter days of the 1990s stock market. How will it end?
Lofty expectations. That said, interest rates remain low by historic standards, and the economy is growing at a steady, if not spectacular, pace. And while prices continue their upward spiral, it's little wonder a growing number of acquisitive home buyers, including speculative investors like Wu and Koder, expect prices in places like Southern California to continue their surge. In a recent Yale University survey of home buyers in Los Angeles, for example, respondents said they expected their homes to increase by an average of 22 percent annually over the next decade, while more than two thirds said they feared being left out of the boom if they didn't buy now. Recent buyers in Boston and San Francisco were similarly exuberant, expecting 13.2 percent and 17.9 percent in annual appreciation, respectively, while also saying they had been anxious to get in before prices rose further.
Yet it is precisely that combination of greed and fear of being left behind that could pop what some experts believe is a dangerously inflated housing bubble in some parts of the country. "It's the same sort of irrational behavior that helped inflate the stock market bubble of the 1990s," Yale economist Robert J. Shiller, author of the prestock market crash book Irrational Exuberance , says of the survey's findings. The last time he observed such extravagant expectations was in 1988, just two years before a housing bust that saw prices in Los Angeles drop by 40 percent in real terms and by about 20 percent in San Francisco and Boston in the early 1990s. Before that swoon, he says, buyers voiced many of the same attitudes they do today: that houses are the best long-run financial investment, with a big upside and relatively little risk.
In cocktail party chatter reminiscent of the days when housewives and taxi drivers confidently traded stock tips, many have oversimplified the real-estate market's underlying fundamentals, Shiller believes. "The typical simplistic view is that it's just supply and demand," he says. "That where they live is such a wonderful place and that since there isn't enough land for everyone, prices have nowhere to go but up."
In truth, sprawling housing developments across the country attest to the housing industry's ability to readily supply the demand, and then some. Last year alone, America's builders started construction on about 2 million homes, nearly twice the number of households the country added. Meanwhile, growth of so-called exurbs in outlying areas demonstrates Americans' willingness to commute more than 50 miles one way to buy where prices are more affordable. Even in crowded places like Miami, a building boom that has transformed once moribund inner-city neighborhoods into massive construction zones is expected to add 25,000 condos in the next year and a half--about five times the number sold last year.
Space crunch. To be sure, physical limits to growth in some areas like Miami's beachfront and along New York City's Central Park are real. As the old adage goes, "The key to real estate is location, location, location," says Patricia Whitehead, an associate broker with New York's Corcoran Group, which estimates that the average price for a condominium in Lower Manhattan has surged by nearly 80 percent since 2000, to more than $880,000. "This island is only so big."
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