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Francis Vayalumkal
Finance | Financial advice

SHOULD WE WORRY ABOUT A REAL ESTATE BUBBLE BUST?
By Francis Vayalumkal

It has become a normal thing to hear my Realtor® friends and customers say “I sold my house in less than a week;” “I got offers for more than my listing price.” The latest was “I don’t want to list my house for sale yet, because I know it will be sold in few days!” Housing demand in Florida has increased tremendously in the recent years. Together with that comes the increase in prices.

Florida is ranked fifth nationally in housing appreciation in 2004. Housing prices in the Sunshine State rose 18.79 percent last year. That may not be high compared to Nevada, which has the highest rate of appreciation at 32.38 percent in the last year. But compare it to our southeastern neighbors. Georgia had a hike of 5.4 percent and Alabama, South Carolina and North Carolina had an increase of less than third that of Florida home prices.

Within Florida, the Tampa Bay housing market continues to appreciate steadily. According to data from the government's Office of Federal Housing Enterprise Oversight, Tampa Bay area housing prices rose 16.83 percent in 2004, which is lower than the statewide average.

There are several reasons that prices have increased at such a high rate in the recent years. According the David Lereah, chief economist of National Association of Realtors (NAR), housing prices may have appreciated faster than income in the last few years but significantly lagged income during the 1980s and early 1990s. “Now we’re just playing catch-up,” he says.

Mortgage interest rates were at a 40-year low recently and they still stay stubbornly near 6 percent, which is lower than where the Federal Reserve chairman Alan Greenspan and his team would like. With these low interest rates and the easiness to get financing, people are investing more and more in real estate. Another important factor that cannot be ignored is the amount of people from Northern states moving to Florida or buying second homes in Florida.

With the high price in homes in Northern states, it is easy for someone to sell their home there and buy a house of same or even bigger size in Florida and still have extra money. Many builders in the area believe that the available land is difficult to find and increasingly expensive to buy. Those costs are of course being passed on to the customers.

With this high rate of increase in home prices, should we worry about a real estate bubble busting in the area?

No, seems to be the answer from experts. “You need a bubble to bust and, except for few markets, we don’t have one,” says David Lereah. According to him, continued expansion of the real estate market should last for another decade, fueled by several solid underpinnings: low interest rates, strong demographics, immigration, lean housing supply and recent innovations in housing finance. He predicts that between 2005 and 2014, existing home sales should average between 6.1 million and 6.4 million annually. Many other experts expect lesser time for continued growth. However, most look for few more years of double-digit appreciation in real estate values.

While we don’t expect to see a real estate bubble bust, keep in mind these points, which you might want to consider as red flags. Investing in real estate has become an alternative to stock market. A recent NAR study shows that one in four houses purchased last year was for investment. "We've seen a shift over the last few years with a growing number of second-home buyers purchasing primarily for investment," Lereah says.

Increasingly, an investment practice known as "flipping,” used to buy and sell distressed or undervalued property, often without any renovations is seen in large numbers. The boom in condominiums has accelerated this trend to the point where condos are sometimes bought and sold for profits, multiple times, even before they are built.

It won’t be too long before the interest rates go above the stubborn 6 percent rate. Most of the investment homes are on adjustable rate mortgages (ARM). Investors assume they will sell their properties within the ARM period. They are assuming that housing values will increase. What if that does not happen? According to the Mortgage Bankers Association, one third of all home mortgages are now adjustable, meaning the carrying costs of investment homes that are not selling could get expensive in a hurry.

Many experts agree that the appreciation may not be in such great rates but surely there shouldn’t be a bust that we have to worry about for some time. As Morgan Stanley's chief U.S. economist Richard Berner puts it, home prices are likely "to rust, not bust."

Francis Vayalumkal is a loan officer at Market Street Mortgage and can be reached at (813) 971-7555 or via e-mail at francis.vayalumkal@msmcorp.com


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