Not a bubble

I’m almost sick of writing this, but every now and then it seems people need a reminder.

We are not experiencing, despite what some may say, a national real estate bubble.

First off, all real estate is local. So the very notion of a “national” bubble is somewhat sketchy. Yes, the real estate climate leading up to the financial crisis of 2007-08, was an event that largely affected the entire nation. But you have to imagine that entire nation being made up of individual markets.

Last time, there were very few, if any, individual markets that got swept up in all the fury. It started with a handful of markets, then spread as credit got easier and easier and speculation ran rampant.

And sure, in some markets home prices are appreciating at rates we saw around the last bubble. But in those markets, such as San Francisco, the main driver is high-paying jobs. That’s a fundamental factor – people moving in and making a lot of money. That’s going to increase demand for high-priced homes and drive high prices higher.

And if fundamentals are what’s driving prices upward, there is no reason to panic.

Last time around, as the American public’s appetite for real estate grew, so did lenders’ willingness to feed them. If you had a pulse, you could get a mortgage. One of the commonalities that every bubble has – stocks, commodities, real estate, you name it – is a widespread availability of funds and credit. Easy money means every Tom, Dick and Harry can get in on the action, whether they’re financially able to support it or not.

This time, credit isn’t so easy, as many would-be homeowners can attest. So not everyone CAN get in on the game this time, and there certainly seems to be no over-investment into mortgages that exceed the value of the homes they finance. That was another problem in the early part of this century.

The other important thing to note is that while, yes, residential building is at a nearly decade-long high, it was so down for so many years. The annualized rate of new homes in this country is somewhere around half of what it was in 2005 or 2006. There is much less speculation now, no builders who are doubling their money on properties in the time it takes to build them.

And that’s because the individual investor of today isn’t as speculative. Remember the condo markets in places like Miami right after the bubble burst? New construction was going for buy-one-get-one deals because the pace of building was built entirely on speculation, more specifically the constant flow of speculative investors.

But once bitten, twice shy, they say. Speculation gets people burnt, and people don’t touch the hot iron with as much eagerness the next time around. Besides, even if they wanted to, there’s no easy money that allows them to do it all that easily (see above).

Nobody should be surprised that home prices have escalated the way they have. After the crash, prices dropped so low that they basically had only one way to go. And guess what? The economy recovered. People got jobs. After years of being afraid to buy a home or not being able to afford it, pent-up demand was unleashed.

And when supply is low – and it is, for reasons on top of the aforementioned lack of new construction, too – and demand is high, what happens to prices? They rise. In many places, they have risen rapidly.

But that alone doesn’t a bubble make.

Over-investment makes a bubble. Speculation makes a bubble. Widespread public participation in the frenzy makes a bubble. Prices that exceed the fundamental value of what’s being sold make a bubble.

That’s not what’s going on. So, nope, this still isn’t a bubble.