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Pop goes the market: Responding to the bubble
Wednesday March 1, 6:00 am ET
Holden Lewis
It is a truth universally acknowledged that a family in possession of a suddenly valuable house is in want of advice.
The same goes for renters who have been warily watching home prices zoom into the stratosphere. They want to know what to do, too.
Whether you already own a house or want to own one, you're probably wondering:
whether your real estate market is in a bubble;
whether it was in a bubble that has burst;
whether a bubble is about to start inflating in your area;
or why the bubble passed your town by.
Furthermore, being a practical person, you're asking yourself (regardless of the strength or weakness of your neighborhood real-estate market): What's in it for me? How can I work things to my advantage?
You have come to the right place for the answers to these deceptively complex questions. The articles in this real estate guide will advise you what to do in a changing market, whether you're a seller or a buyer.
This guide is informative, but not dull. First comes a look at what $400,000 will buy in 24 cities. Wait till you compare the house 400 grand buys in Fort Wayne, Ind., versus the condo it buys in Miami, Fla.
Dealing with a changing market Maybe you've lived in your home for a few years and its value has zoomed. Congratulations. You've made money on paper. But if you sell, you might not be able to afford another house in the same market. Has your home become a prison?
What if you want to sell your home, but sales have cooled and it's turning into a buyer's market? There are ways to make your home stand out from the crowd.
A real pro can make money whether home prices are going up or down. Here are ways to profit in a changing real estate environment.
Which direction are interest rates headed this year? Greg McBride makes predictions.
Moves to make It might be time to re-think your mortgage. A lot of homeowners will bail out of their adjustable-rate mortgages over the next two years.
Whether you're buying or selling a home, Bankrate real-estate advice columnist Steve McLinden has a list of 10 mistakes to avoid.
A lot of agents will tell you that you shouldn't make insultingly low offers. Yeah, well, the market is shifting in favor of buyers in some places, and that means it's time to brush up on the old negotiating tactic of making a lowball offer. Or, better, yet, making several lowball offers, as Joanna Glasner explains.
Don't want to be on the bad side of a lowball offer? Protect yourself from a housing bubble: Be careful about how deeply you go into debt, and don't buy your residence primarily as an investment.
Some homeowners decide to get out while the getting is good. They cash out and collect their money before home prices fall.
But what do you do after you sell your house near what you hope is the top of the market? Go west -- Midwest, that is.
And we give you guidelines of what to do, depending whether your area is about to pop, still inflating, or not in a bubble at all.
Like a balloon What, exactly, is a housing bubble? It's a rapid increase in home prices that is followed by a steep decline. By that imprecise definition, housing bubbles are uncommon. Most booms end when home prices plateau for a few years. Those aren't bubbles. A minority of booms -- one-fifth, according to an FDIC study -- are followed within five years by busts. Those are bubbles.
Are you living in a housing bubble? You can't know for sure until it bursts. A bubble could pop, throwing home values down a flight of steep stairs. But it's more likely that prices eventually will stagnate for years while rents and wages catch up.
By the way, the aforementioned research paper by the Federal Deposit Insurance Corp.? It defined a bubble as a 30-percent rise in home prices in three years, adjusting for inflation, followed by a 15-percent drop in home prices in five years. The researchers counted 54 booms in 46 metro areas from 1978 to 1998, followed by nine busts that began within five years. The researchers spotted nine more booms that began after 1998, but none of those markets had popped as of the end of 2003, the latest data the scholars had. Since they haven't had time to pop, it's too early to know if those markets were bubbles.
Assigning blame Economists, builders, real estate agents and others have attributed the steep rise in home prices to an array of factors, depending on the market.
Builders point the finger at laws that impose restrictions on land use and building density, and they complain that protecting endangered species puts prime home-building sites out of bounds. Recently the National Association of Home Builders encouraged the federal government to take the bald eagle off the endangered species list to "help landowners and others understand how to protect the bald eagle while continuing to keep housing affordable."
In other places, the bald eagle isn't the designated culprit, geography is. When prices were zooming in San Diego, real estate professionals pointed out that the city is bounded on the west by the Pacific Ocean, on the south by Mexico, on the north by military installations, and on the east by desert mountains. There aren't many places to expand.
Immigration is a widely cited factor in California, especially the southern part of the state. In South Florida, experts blame rampant speculation, as short-term investors buy condominium units and even houses long before they're built, on the assumption that they'll be worth a lot more after completion.
Speculation also seems to be the culprit in other markets that have boomed in the last few years -- Phoenix, Las Vegas, Boston, and New York City and Long Island, most prominently.
In their heads The roots of housing bubbles grow in people's brains. When you bid up the price of something because you're sure the next buyer will pay even more, you have enlisted into bubble psychology. If most of the local market's home buyers join the ranks, prices spiral upward. Then, at some point, prices slow down or stop rising or even fall. In the latter case, a bubble pops. Sometimes there's an external factor -- a recession or a big layoff -- and other times there's no discernible reason other than people stop believing that prices will continue to skyrocket, just as they stopped believing in the tooth fairy when they were kids.
