Real Estate News

No Speculative Bubble In Housing Prices, CU-Boulder Business Professor Says

While rising interest rates and increased inventory of houses for sale indicate a cooling of the residential real estate market, the housing market has not experienced a speculative investment bubble that is about to burst, according to Thomas Thibodeau, the Global Real Estate Capital Markets Chair at the University of Colorado at Boulder's Leeds School of Business. "Bubbles occur when prices don't reflect the economic realities" and the economic realities, especially outside of hot real estate markets in California, Boston and Washington, D.C., track with current economic conditions, Thibodeau said. Several factors have combined to help drive up housing prices over the past decade from greater availability of credit to shifts in preferences among demographic segments such as single adults, Thibodeau said. A major factor has been greater availability of mortgage funds. Low and no down payment loans from the government-sponsored enterprises Freddie Mac and Fannie Mae mean increased numbers of people now qualify for loans.

"New buyers help drive up prices," he said. "The sub-prime mortgage market is huge. Before, these people couldn't get financing. Now they can, at a price." Thibodeau points out that the use of sub-prime loans as a percentage of all mortgages peaked in 2000, when they accounted for 13.2 percent of new mortgages, and then declined to between 8 percent and 9 percent from 2001 to 2003, the last year figures are available. A demographic factor affecting home prices, Thibodeau said, is that increasing numbers of single people are choosing to buy homes rather than rent apartments. "Both single females and single males shifted from renters to owners," Thibodeau said, noting that 59 percent of single women and 50 percent of single men now own homes.

Housing prices have also increased because households have decided to rebalance their financial portfolios and put more assets into real estate, he said. "They are more concerned about volatility. They made conscious decisions to go into second homes. That raises demand. Recent figures show that four in 10 home purchases are second homes. That's huge." Their decisions also have been aided by the greater availability of funds through home equity loans. "People are more willing to put money into real estate because they have access to the money," Thibodeau said. He added that construction costs, which have increased by 7 percent to 10 percent annually over the past few years, also contributed to higher prices. The combination of factors means that increases in housing prices are consistent with market conditions and are not the result of speculation that generates the danger of a real estate bubble, Thibodeau said. Housing prices may fall over the short term due to rising interest rates but in the long term will closely follow household incomes, which are not expected to decline, he said.

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