December 9, 2004 02:36 PM
Get Real About Real Estate
Excerpt: THE HOUSING MARKET HAS shown Herculean strength in the past few years. New home sales increased 0.2% in October, to the third-highest level ever, according to a recent Commerce Department report. That same month saw new home construction rise 6.4%, to the highest level of the year. But the furious rise in property prices during the past few years leaves some experts scratching their heads in befuddlement and others dropping the "b" word.
THE HOUSING MARKET HAS shown Herculean strength in the past few years. New home sales increased 0.2% in October, to the third-highest level ever, according to a recent Commerce Department report. That same month saw new home construction rise 6.4%, to the highest level of the year. But the furious rise in property prices during the past few years leaves some experts scratching their heads in befuddlement and others dropping the "b" word.
In his new book, "Bubbles and How to Survive Them," John Calverley analyzes some of the major market bubbles of the 20th century, and says that the U.S. is now in the early to middle stages of a housing bubble. Calverley, chief economist and strategist at American Express Bank, writes that there are clear signs of an already inflated housing bubble in the U.K., Australia and Spain. Modern economies, he argues, are increasingly dominated by bubbles in asset prices, be they tech shares circa 1999 or single-family homes today.
So what's driving home prices ever higher? On the demand side, it's low interest rates, relatively low unemployment, rising incomes and increased migration; on the supply side, new building is constrained by planning and zoning restrictions. Calverley also cites a crucial factor that plays into all bubbles — an expectation of future price increases. "In any asset market, whenever price appreciation becomes the main reason for people buying, the market is in danger of becoming a bubble," he writes. "We must suspect a bubble if homeowners are regarding housing primarily as an investment, rather than as a place to live."
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