Housing Bubble About to Burst?

U.S. News and World Report has a long article by Alex Markels regarding the current risk of a blowout in the housing market bubble:

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.

I probably share a common experience with many homeowners in this country. When a home comes on the market in my neighborhood, I'm usually the first one to grab a flyer and see just what ridiculous price they're asking. I then laugh at the homeowners for daring to ask such an astronomical price, while secretly praying that they get it so my house will appreciate even more. Just in my little townhouse neighborhood we've seen prices more than double in just the last 3 or 4 years.

My guess is that an individual's fear of the housing bubble is directly related to how recently he or she purchased their home. If you bought your home 14 years ago as I did, a 20% drop in prices is bad, but not lethal. If you bought last week, you better hope you don't run into some financial difficulties because you won't be able to sell the house without taking a beating, and certainly won't be able to refinance it. I know folks who had to walk away from their homes in the 90's due to a housing bust in their part of the country.

I purchased my townhome back in 1990 for what seemed at the time to be an obscene amount - $197,000. I also bought right before the last bubble burst. Within a couple of years townhomes like mine were selling for $155,000. My original plan had been to move in five years and plow the profits into a bigger home. That plan burst along with the bubble.

By the late 90's the market began to slowly recover and by the time we refinanced in 2001, our home appraised at $270,000. I was pretty happy with that.

Interest rates continued to drop and prices continued to rise, so in late 2002 I refinanced again, this time with an appriasal of $330,000. Happiness was also on the increase.

Things have only accelerated since then, and I tend to agree with the folks who doubt whether this pace can possibly keep up. A model just like mine one street over recently sold for $540,000, and my neighbor just put his home on the market (same model as mine) for $575,000. God bless America!

There is a downside, of course. As I was discussing with some friends over dinner the other night, my kids are going to have some real problems in a few years when they want to buy something to live in. What's a fixer-upper starter house in Southern California going to cost - $800,000? No young couple is going to be able to afford that.

However, these things have a way of working out. I still remember my dad talking about our new family home that he bought in Huntington Beach in 1977. Five bedrooms, two stories and about 2500 square feet. I remember him saying that he didn't know how in the world they'd ever be able to make the payments. The cost - $85,000.