Your house seems to be acting like Cisco in early 2000. Home values surged 17% or more during the past year in cities hardly known for their flash, such as Tucson, Ariz., and Topeka, Kans. Many buyers are waving bids around without even inspecting the property. And money is flooding into McMansions and vacation homes, reminiscent of the cash that rushed into technology-stock funds that were all the rage a few years back. So the bubble police are on full alert, sensing another NASDAQ-like flameout.
But don't let it concern you. Bubbles are for tech stocks, not homes.
Real estate is an incredibly steady investment. Not once since the 1960s, when records were first kept, has the nation's median home price declined in a calendar year. There have been plenty of regional busts, as in Texas following the '70s oil boom and in New England during the late '80s. Yet overall, home prices have risen an average 6.3% annually. Part of the appeal is that even when supply and demand turn sour, home economics makes sense. Mortgage interest is deductible, and when they sell their home, a couple can walk away with $500,000 of their gain tax-free.
Some softening is inevitable. Select markets such as Baton Rouge, La., and Philadelphia dropped 1% during the 12 months that ended last March. Existing-home sales and new starts fell nationally in June. So there are some cracks. "I don't think it's inappropriate for people who are getting battered on their stocks to look around and ask, 'Where else am I vulnerable?'" says Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard. But economists say that when the housing boom finally ends on a broad scale--and that could be a year or more away--most homeowners will see merely stunted appreciation, not declines. "Real estate is the place to be," proclaims Melvin Barney, an attorney from Cleveland.
The housing market's foundation is solid. On the supply side, the inventory of houses for sale is lean and buildable lots in desirable neighborhoods are scarce. On the demand side, an increase in immigration, the coming of age of baby-boomer children, and affordable-loan programs for low-income families are fueling the market for starter homes. Boomers are in their prime earning years and are eager to move up to larger digs or acquire a vacation home. And best of all, interest rates are low. "We've looked at the bubble question, and we've concluded that it is most unlikely," Federal Reserve Chairman Alan Greenspan told the House Financial Services Committee on July 17.
It's true that home values have been rising faster than family income for years, a trend that can't last. Since 1990, family income has grown 3.8% a year while home prices have risen at a 4.5% clip. The median home now sells for 2.8 times the median family income--up from 2.6 in 1990. But this ratio has historically ranged from 2.5 to 3, so the current reading puts housing squarely in the fair-value zone.