There is even more discussion about the real estate bubble, especially since Fed Chair Alan Greenspan warned of housing “froth”. SmartMoney magazine recently ran a bull vs. bear debate on the topic. The bulls make the familiar argument of low interest rates, strong demand, low inventory levels, limited land supply etc. The bears, on the other hand, point out that when rates eventually rise, housing will be hard-hit.

The best discussion of the bubble I’ve seen so far is this SmartMoney column by James Stewart. He suggests that we should consider housing not as an investment, but as a consumer durable necessity. Of course, this only applies for owner-occupied homes and not to investment properties.

Take my own situation: We lived in our own home purchased more than two years ago. We have a significant equity in our house. If we sell now, we have to rent someplace and wait for the housing market to crash. That could take years or not happen at all. Meanwhile, we would be giving up a significant “imputed income” we derive from our current house and incur all the frictional costs of selling and then buying a house. So, we are staying put but staying away from any real estate investments.

This article has 4 comments

  1. I’d say that’s smart. Otherwise you’d be trying to time the real estate market, with high transaction costs. Go Bubble! 😉

    Now where are the flying cars? Now THAT would make real estate prices go crazy.

  2. Jonathan: You are absolutely right. If you already live in a house for a while, a bubble (or not) is neutral, except for the wealth effect. A bubble is a big concern for someone planning to buy their first home, but they have the option of renting for some more time. For a homeowner, a house is not a tech stock. Its primary purpose is providing shelter and if you own the house, it provides imputed income in the form of rent you have to pay otherwise with after-tax dollars.

  3. I agree with your views on this subject.

    I am slightly concerned about the 25% of the properties bouhgt in 2004 that where not owner-occupied.

    That could generate some extra inventory that could eliminate some of the “froth”.

    However, I do not think house prices will decrease by more than 15%.

    The improving job market will counteract the bubble effect.

    Money and Investing

  4. I don’t know. It’s really a double edged sword. I read somewhere last year that 40% of americans could not qualify for a home mortgage, therefore opportunities existed for those who wished to purchase homes and either rent out or resale on a lease to own basis. Only time will tell if this will have a negative impact.