Personal Finance: Housing bubble not yet ready to pop
It's clear by now that real estate is the investment of choice for most American families. But what's unclear is how much longer this real estate boom will last. By historic standards, the duration of the current housing market expansion is unprecedented. According to a report released this week by Harvard University's Joint Center for Housing Studies, the current housing boom has lasted 13 years. Let's put that in perspective: Since 1970, the next-longest streak of uninterrupted growth in the housing market was only five years.
Does this mean the housing bubble is about to pop? Not necessarily. In fact, while there are a number of reasons to worry that homes are becoming as frothy as Internet stocks were in the late 1990s, there are an equal number of reasons–outlined in the Harvard report–to think the real estate market isn't ready to collapse just yet. Among them:
- Typically, bubbles burst when markets overexpand. Yet despite the recent building boom, "the inventory of new homes for sale relative to the pace of home sales is near its lowest level ever," the Harvard report concluded.
- While it's true that real estate speculation is on the rise, serial flipping (buying a home with the intent of selling in less than a year) is actually very rare, just as day trading was in the late 1990s. The proportion of homes flipped only rose from 5 percent to 6 percent between 1998 and 2003.
- Despite rising short-term interest rates, mortgage delinquency rates remain low by historic standards. Moreover, the report indicated that the share of sub-prime mortgages categorized as "troubled" fell from 4.7 percent of the market at the end of 2003 to 3.8 percent last year.
- While adjustable-rate mortgages, or ARMs, are growing in popularity, so too is the length of the fixed-rate portion of those ARMs. In recent years, one-year ARMs (mortgages where the first year's interest rate is fixed but the rate floats in subsequent years) have fallen in popularity. Meanwhile, five-year ARMs (where the first five years are fixed) are being used more. This means households may not be in as much immediate trouble as some fear should interest rates rise further.
The Harvard report concluded that demographic trends should prop up housing demand in the coming years. In addition to the rising number of recent immigrants who are joining the ranks of homeowners, baby boomers are expected to "keep housing demand going stronger," the report argues.
Paul J. Lim writes Biz Buzz, a daily Web column devoted to money and business news, features, and advice.
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