As I’ve reported in this space in previous articles, the real estate market has been enjoying record price increases and steady growth. In fact, San Diego prices have recently climbed higher than in the prior pre bubble peak. This naturally gives us pause, and we wonder whether we are entering bubble territory once again, and might be in for a significant price dip.
What is a housing bubble? It is a phenomenon that occurs when prices become extraordinarily high, far surpassing comparable increases in income, and there is a frenzy of buying with the public convinced that it is imperative to get into the market and buy. Our last true bubble period occurred between 2001 and 2005 when prices of San Diego homes surged up more than 60 percent faster than income levels. There was no fundamental reason justifying the price increases which continued to jump up year to year at a feverish pace. The buying hysteria was so frantic that people ignored their inability to handle loans and other expenses, believing they would be one of the “losers” if they failed to get on the bandwagon.
We’re now in record territory also, but are we about to enter a bubble? Experts see differences between that frenetic time and today, and using analytical models to measure the two climates, assure us that we’re not there yet. The investment advisor, Jeremy Grantham, came up with a metric to determine when bubble territory was breached. Suffice it to say, his measurement for “bubble” levels was one that has occurred less than 2.3 percent of the time.
Looking at today’s prices, we would need to see a rise of an additional 18 percent over rents and income to move into bubble land. When you take into account our current low mortgage interest rates, even our very high current prices do not move buyers to this level of expenditure that spells bubble.
We’re also not seeing the price increases radically increasing year to year. Yes, they’ve risen but not in double digits. And though we see buyers out shopping, there’s not the elevated emotional quality driving their search. They are seriously looking but they won’t take just anything and overpay for it. Maybe we’ve learned our lesson when it comes to housing bubbles. So many individuals suffered in the last go-around that memories are still vibrant. Experts still worry and are constantly evaluating the data to check for alarming rises. In the U.S. today, prices have surpassed their 2006 peaks, and that makes fact checkers sit up and take notice.
Could it happen again, they wonder? Prices are driven up by many factors including lack of supply and scarcity of new construction properties, but with incomes staying fairly flat, there is a limit to how far skyward prices can go before, pop … a bubble becomes inevitable. So buyers, be vigilant. Remember that what goes up will inevitably come down and some kind of correction might be around the corner. Do your homework, and buy wisely.
