What is a real estate bubble? Everyone is working hard to either confirm or deny that a bubble is occurring in the real estate market, but since the definition is so muddy, we can not determine what the parameters are? With the stock market, there is a period where stocks rise quickly, then fall drastically. That is the typical bubble effect, but in real estate, this process occurs over years. People do not sell their houses for too little money, they will either take it off the market, or leave it on the market and be patient.

The New York Times delves into this question with a well written and well thought-out article on what a real estate bubble could be. In the late 1980’s, the northeast had a difficult period in real estate.

Adjusted for inflation, the losses were far worse: about 30 percent in parts of the Northeast and even more than that in Southern California. Prices peaked in about 1988 and did not return to their highs – relative to the price of everything else in the economy – until about 2000.

In Boston, where prices fell 25 percent in the early 1990’s, after adjusting for inflation, “people were bringing checks to the table” to cover shortfalls in selling prices because their mortgages were larger than what the buyer paid, said Robert Buckley, a real estate lawyer in Boston.

This happened to people we knew, where they had to bring a check to the closing table. Very scary for young homeowners. But this was not the rule, but an aberration.

Adding to the current confusion is a flurry of recent statistics that have pointed every which way. The Commerce Department reported last week that the number of homes starting to be built last month surged more than 10 percent compared with a year ago, a sign of builder optimism. But the number of existing homes for sale in several markets, including New York, Boston and Washington, is also rising, as is the average amount of time it takes to sell a home. In Manhattan, the recent fall in apartment prices caused The New York Post to exclaim, “Real Estate in Bubble Trouble.”

Taken as a whole, the numbers suggest that the hottest markets really are cooling off, in a way that seems more serious than other pauses of recent years. Still, both versions of the booms end – the gentle one and the harsh one – look possible. So both definitions of bubble remain in play.

So the term bubble will be tossed around over the next couple of years. Some areas that are overpriced will decline a little, other areas will continue to grow consistently. Isn’t that the nature of the real estate market?

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3. Bottom Of Real Estate Market Is Early 2009 According To Realtor Survey
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5. Boston Real Estate Sales Coming Back – Are Yours?