Real Estate Bubble – Yes or No

There was an interesting article in the Contra Costa Times (front page) last Sunday (June 16th).  It posed this question that, frankly, Realtors® just as soon not answer; is this Real Estate Market another Bubble?  We see the prices continuing to soar just like they did from 2004 to 2007.  And looking back upon 2007, we know that the market was actually at the start of a major decline in Real Estate Values which lasted until at least the end of 2010 (longer in some areas).

The following is a summary of the comparisons made in this article that compared the Real Estate Market of 2005 (which in retrospect was clearly a Bubble) to today’s market.  This comparison includes opinions by multiple financial experts.

Let’s start by listing some of the concerns (in this article) that a Bubble is again, occurring.

  1. The number of Cash Buyers across the 9 Bay Area Counties accounted for 28% of the sales of all residential property types.  That’s substantially higher that the historical average of 13%.
  2. Prices jumped by 17% from March to April for all types of Bay Area homes; the largest jump since 1988.
  3. The risk of buying in this market; you take away the ultra-low interest rates, ultra-low inventories and ultra-high investors and there will be an impact to our market.

Now let’s address the Bubble Issue:

A bubble occurs when home prices are significantly higher than their fundamental value which is determined by rents, incomes and long term trends.  I guess you have to be a Finance Expert to know what criteria contributes to Long Term Trends.  The factors listed below suggest that we are NOT experiencing a Bubble.  They are:

  1. In the Silicon Valley, home prices are 3% above their Fundamental Value, compared with 59% in 2005.
  2. In the San Francisco Metro area including San   Mateo and Marin, home prices are 2% above their Fundamental Value compared with 52% in 2005.
  3. In the EastBay, home prices are Even with their Fundamental Value compared with 73% in 2005.
  4. The Bay Area Median price sits at $564,250 compared with it 2007 Peak of $738,500.
  5. There are virtually “NO” no-money-down purchases today.
  6. There are a significant number of cash buyers that are still buying in this Hot Market.
  7. There are a high number of buyers putting down 20% to 40% on their purchases.

After reading this article, I came up with the following conclusions.  These factors should ease “some” of the fears that buyers may have about jumping into this Hot Market and whether we’re experiencing another Bubble.  Further increases in interest rates (which we are experiencing right now) will help some buyers.  They may sound odd, but increases in interest rates (while reducing buying power) should slow the number of offers and overbidding and start to soften price increases each month.  However, buyers should still be cautious about over paying in neighborhoods where you’ll be the most expensive home on the block.

So is it a good time to buy?  Hell Yes!  Interest rates that are now hovering just under 5% are still great compared with 6.5 and 7% interest rates that will be back with a normal economy.

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