The Housing Bubble: Will it Burst?

Historically low interest rates have encouraged more people to buy homes that couldn't buy them before, and encouraged people that could buy homes to buy bigger and more expensive ones. Economists can't agree on whether there even is a "housing bubble," or what direction the housing market will take in the future.

In some parts of the United States, the housing market is clearly super-heated, with values escalating as much as 15 percent a year or more. In some of these cities, homeownership is no longer something the middle-class can even consider. With the median price of a home topping half a million dollars in some cities, homeownership in those areas is for the rich alone.

Nonetheless, whether there is a classical "bubble" or not is still up for debate. In fact, the average price of a home hasn't gone down since the years of the Great Depression, an encouraging fact for homeowners, investors and banks, and a fact that would give support to the argument that there is no "bubble." On the other side of the coin however, it may be true that prices have not gone down since the Depression, but they have not gone up this quickly until recently. Historically, housing prices have kept pace approximately in line with the rate of inflation, but more recently, housing prices are escalating well above the inflation rate, by 60 percentage points or more. In that respect, one can deduce that there is, in reality, a "bubble." If you are an average wage-earner and live in San Diego and cannot afford the $600,000 plus required for a modest tract home, then for you, the theoretical bubble is very real.

If housing prices do in fact, go down--especially in those overheated cities where homeownership is unattainable except to the upper classes--the effects on the economy would be a double-edged sword. Decreasing prices would mean more people could afford homes, but by the same token, the results could be devastating in some circles. Americans have more invested in real estate than in the stock market, with more people putting money into real estate every day under the belief that it is an investment that can never fail.

Economic cheerleading to the contrary, in fact there have been housing "busts" in the past, and since the Great Depression. In the mid- to late-80s, the housing market in Texas, especially around metropolitan areas such as Dallas, suffered a tremendous crash. Other regional housing busts have taken place since then, in parts of Southern California, and parts of Massachusetts and Connecticut. When speaking of a housing boom and subsequent bust, one must realize that the housing market is highly fragmented. A home in Fort Wayne, Indiana may cost $90,000, whereas if the same home were transplanted to an equivalent piece of land in San Francisco, it may cost $900,000.

Double-digit annual rises in housing value isn't the rule for the entire country, and in many locations, the rise is more moderate--keeping up approximately with inflation, as it should be. As such, there is no national housing boom, and will be no national housing bust--but in those areas currently seeing double-digit annual jumps in value, where the American dream of homeownership has been taken away from the middle class--yes, that bubble may burst, and if it does, the fallout will impact those local and regional economies in ways that can't yet be predicted.

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