A bubble or a balloon?

As home prices continue to escalate at a mind-boggling rate, the big question among real estate professionals these days is whether or not this constitutes another bubble. Leading economists seem united in their response that it is not. Their reasoning has to do with governmental safe guards that have been put in place to further regulate the banking industry. “Liar loans” (i.e. loans based on non-verifiable resources/assets) are a thing of the past, they say, so only people who can actually pay their mortgages are getting loans. Furthermore, the irrefutable law of supply and demand will keep prices on the rise.

As average home buyers get priced out of Seattle’s core, they are trading increased commuting times for lower housing costs by purchasing homes north and south of Seattle. However, it seems obvious that this is not a sustainable solution either. We will eventually reach a tipping point where the trade-off no longer makes sense.

Getting back to the question of whether or not we are heading for another housing bubble, perhaps a better analogy is a balloon. Although a balloon can certainly burst, it has an obvious and controllable source of inflation. If you stop adding air, it simply stops getting bigger. Buyers do not have unlimited amounts of money to spend on home purchases. Once the bidding warriors run out of money, prices will have to stabilize.

While competition for a limited supply of homes will undoubtedly keep prices high, at some point, the rate of increase will have to decelerate and market value will become easier to determine. This may be a long way off, however.

The good news is that the balloon scenario is unlikely to result in the recessionary drop in home values we saw in 2007. Rather than seeing their equity disappear, homeowners will simply see much more modest and reasonable gains.

Once again, real estate proves to be a solid investment over time.

I welcome your questions and comments.

Posted November 2, 2015

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