I'm one of those people who believes that the housing market is in some sort of bubble - maybe big, maybe small. I don't know how big it is, but there are a number of reasons to believe that the bubble exists.
First, there's a study I saw referenced perhaps six months ago (by John Mauldin in his excellent weekly newsletter) which claimed that historically house prices rise with inflation. But in the last 5-10 years, housing prices have risen about 30% higher than inflation, suggesting that they will fall or be flat for some time in order to match inflation.
Another factor arguing for a fall in housing prices is the fact that mortgage interest rates can't go much lower, and are generally expected to rise somewhat in the next year or so. If interest rates go up, then the amount of house any given buyer can afford goes down, and since it's the current buyers who determine the expected value of everone's houses, then it would seem that increased interest rates would drive down house prices.
Finally, the Baby Boomers are going to retire over the next decade, and many of them will probably move into other housing, which should create excess supply.
All of these factors and more indicate that housing prices should go down. But at the moment, on average, they're still going up. Here in the Boston region, rents have been going down a bit, while house prices are still skyrocketing, and this discrepancy is another factor indicating that something is out of whack in the housing system. I, however, don't have any good feel for how much prices might go down, and I don't think anyone else does either. Nor do we know when they might go down. So, if you wanted to buy a different house, what should you do? That question is one I'm asking myself right now, because we'd like to get a different house in which to raise our baby, but I'd rather not buy a bigger house right at the peak in housing prices. If you have a suggestion, please let me know what it is...
Posted by Tom Nugent at January 4, 2004 10:58 PM