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Wednesday, September 20, 2006

Keeping Perspective on "The Bubble"

As I listen to the news lately, I keep hearing about the bursting of the "housing bubble". Yet as I listen, as a former Realtor, I laugh about the lack of perspective in the number of sales.

For instance, the June/July numbers show that the adjusted rate of sales for this year of existing homes is going to be somewhere around 6.62 million units, well off of the 2005 record over over 7 million. That's why everyone is freaking out, it's a big drop.

But they aren't looking with any perspective; the number is about 200,000 units higher than the 2004 number, which is the second highest year on record, behind 2005. It's about half a million higher than 2003, the third highest year on record.

What is being seen, in a few areas, is a drop in prices to where they really should be; and what's being seen nation wide, much like the stock market does, is a correction. Sales are falling to the levels they should be at, or would have been at, had interest rates not been held artificially low for a few years.

So what you are seeing, in a "bubble bursting" scenario, is the third highest year on record for existing home sales.

Since I mentioned rates, while folks are freaking about them also, they shouldn't be. Before 2002 the average home loan rate was just over 8.5% over a 20 year period. I remember a friend refinancing in the late 1990's for 8.25 and talking about what a deal it was. When I got a VA loan at 7.5% in early 2001 the loan officer commented about how she'd never written a VA loan that low.

So today, folks are complaining that they are getting crushed by a 6.25% mortgage. No, what they are doing is seeing a dose of reality, and not a good one, since they are still better than 2% below the historic range of interest rates.

What do I expect to see in the near future in the market? Well, first off a decline of the "McMansion" culture that grew out of the 3% mortage market. In all likelihood you'll see a lot more subdivisions of less than 2500 square foot homes start going up again, along with more reasonably sized and priced condos and townhomes.

While rates are going to put bigger homes out of reach of some buyers, the construction industry has traditionally adjusted to changes in the financial market fairly well, the last five years have proven that. Look for smaller houses, in more reasonable price ranges to start popping up in the very near future. You'll probably see some changes to proposed subdivisions that have already started advertising to make sales more attractive.

Existing sales in the lower price ranges are still fairly brisk, while the higher priced homes are spending more time on the market. Yes, some areas are seeing a bigger slow down, but many of them ended up overpriced for one reason or another in the last 5 years.

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Blogger shoprat said...

Where I live there are very few jobs, and people are moving out and it is nearly impossible to sell a house. Still they are building several large apartment complexes. I wonder if they know something I don't or just crazy.

9:29 PM  
Blogger Crazy Politico said...

When you can't sell houses, and people can't keep them, they still need somewhere to live, that's where the apartments come in.

I know that Flint, Mich. has some huge areas of basically abandoned homes, but a near equal number of newer apartment complexes.

10:20 PM  

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