IS THERE REALLY A HOUSING BUBBLE?

It�s hard to pick up a newspaper these days without seeing coverage, many times prominent, front-page, wildly exaggerated coverage, of the state of real estate in the U.S. today.  The often implied �housing bubble� and concerns over �speculative� or �investment� buying catches the interest of a large number - and broad spectrum - of consumers.

Concerns about a housing bubble are based on conditions in a relatively few overheated housing markets that are mainly in California, Florida and Nevada.  From the 1^st quarter of 2004 to the 1^st quarter of 2005 many of these areas experienced a percentage change above 30%.  Here in Johnstown the percentage change was 3.7%.   Speculation about a housing bubble is not really relevant to the vast majority of the nation�s 74 million home-owning households because their markets are not experiencing super-hot appreciation rates. In most areas of the country the prospective buyers will find relatively affordable prices and financing opportunities that are safe and secure at some of the lowest mortgage interest rates in decades.

According to a study released in May by the Federal Deposit Insurance Corporation (FDIC), most local market price booms in the past were followed by periods of price slowdowns or stagnation that allowed other economic fundamentals - including household income and housing supply - to catch up.

There also has been a lot of noise about speculative home buying and its affect on home prices.  In fact, a recent National Association of Home Builders (NAHB) survey of large national builders showed that just 3 percent of new single-family homes are being sold to speculative investors.  And the contention that speculation will burst the so-called �housing bubble� is not supported by the facts.

From a national perspective, the amount of speculative buying in the market for new single-family homes appears to be relatively low at this time, thanks largely to the efforts of builders who recognize the dangers of speculative activity.

Further, keep in mind that over the next 10 years, the U.S. population will grow by 30 million people, and each and every one of them will need a place to live.  In fact, household growth, along with replacements of existing homes and demand for second-homes, virtually guarantees demand for about 2 million new homes per year over the coming decade.

Despite this burgeoning need, builders aren�t likely to get ahead of demand anytime soon.  The building industry is challenged by major constraints on new development, particularly in high-growth zoning ordinances, not-in-my-backyard sentiments and significant regulatory hurdles.  In fact, in some very popular markets, it can take four to five years to get through the approvals process before breaking ground on a new project.  When land is taken off the market in this way, existing-home prices rise accordingly as demand outpaces new supply.

It�s important to remember though all of the buzz associated with rising home prices that basic rules of supply and demand virtually ensure that home values will rise in the future, though likely at a slower pace than that charted in recent history.