For years now, each time I set out to do a story on housing market conditions, I had a hunch a bubble was building. But once I reported out the story, I came to the conclusion that even if the market was getting frothy, there was no end in site to the bull run in real estate.
But, as of my latest piece (See, "Real Estate: Avoid the Burn"), I've changed that assessment. I'm now convinced a bubble is building. My only question is whether it will burst or just slowly deflate, and when.
What's changed? For starters, there's a lot more speculation now than there was just a year ago. The National Association of Realtors reports that 36% of home sales in 2004 were second homes. Of those, the number of people reporting that they made the purchase primarily as an investment climbed from 20% in 1999, to 64% in 2004. That doesn't sound like a sustainable source of new demand to me.
Even more significant: Interest rates are headed higher. That means more expensive mortgages and bigger bills due on all kinds of debt, including credit card payments (See, "Say Bye! Record low rates are gone" from Bankrate.com). Even if house prices stay the same, fewer people will be able to afford them.
Perhaps higher rates will create a rush to buy among house hunters who want to lock in their mortgage before rates climb higher. That could inflate the real estate bubble more -- especially if rates tick up only moderately in the months to come. If we start seeing a spike in prices now, that will be all the more reason to worry about real estate.