So What Defines a Housing Bubble? I Think I Found an Answer : The Real Estate Bloggers

So What Defines a Housing Bubble? I Think I Found an Answer

March 19th, 2006 • Related • Filed Under

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

When we discuss the  housing bubbles that are occurring around the country I find it hard to determine what the housing bubble is? Where is the line that defines the bubble and puts the idea from emotional to rational and practical. In an article in todays North County Times, they defined the housing bubble as when housing purchases are much more than the equivalent house will rent  for in the same market.

So if a house sells for 500,000 dollars and you can rent the equivalent home in the same market for 1,200 dollars a month you are in a housing bubble. If it costs 3,500 dollars to rent the house you are probably buying correctly. I really like this definition and am curious to take the analysis to the next level  on this.

“It’s an irrationally behaving market,” said Christopher Thornberg, senior economist for the widely quoted UCLA Anderson Forecast. “It’s very difficult to figure out where it is going to go.”

Analysts are in wide agreement that the market in San Diego and Riverside counties is caught in a so-called “housing bubble,” but they disagree on the implications.

Being in a “housing bubble” essentially means that home prices have ballooned beyond what a region’s income levels can sustain in the long run. And that, analysts say, is precisely where Southern California finds itself.

“What you’re really asking is, ‘What is an asset bubble?’ ” Thornberg said. “That is when a market price of an asset is completely out of whack with the fundamental value of an asset.”

The fundamental value in the case of a home, he said, is how much it can rent for. And all across Southern California, home prices have risen much faster than rents have, he said. As a result, many recent home-buyers are making higher mortgage payments for the type and size of home that others are leasing for much smaller monthly rents. via North County Times

Other Posts You May Be Interested In:



Previous Post: Indiana Leads Nation In Foreclosures | Next Post: The True Eminent Domain Battle Ground - New Jersey



 

If you enjoyed this post, we can deliver daily content from the Real Estate Bloggers.

Subscribe using your RSS Reader

Or Get Updates Delivered Daily By E-Mail:


There Are 3 Responses So Far. »

  1. Comment by Robert Coté on 19 March 2006:

    Equivalent rent is tricky. That’s what you describe and it is a common metric. A tougher standard would be for a cash flow neutral transaction. $500k house, $100k down, 30yr 6% fixed 28% bracket, etc. Even then $3500 assumes the resale value remains at $500k.

  2. Comment by Linsey on 20 March 2006:

    And, of course, apartments seem to be always insanely overpriced rent-wise — and I’m still trying to figure if it wouldn’t be more cost effective to encourage consumers to somehow buy the apartments instead. But if the area’s in a housing bubble (which Woodland Hills possibly is), that’d be considerably /less/ cost effective, wouldn’t it?

    http://www.consumers-insight.com/woodland-hills-real-estate/ Woodland Hills Apartments for Rent

  3. Comment by Pete on 21 March 2006:

    When everyone tells you that you must buy a condo or a house right now or you will never be able to afford one! - This was happening this past year in Arizona…..No one really knows what the correct answer is but it is scary when there is panic in the market when prices were rising so quickly that there was no top in sales prices in the area. You had to buy now or you would never afford an Arizona home.

Post a Response