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Wow, there sure is a lot of press on the “Real Estate Bubble”….

Is there a bubble? If so, is it going to pop, burst, explode, grow or shrink?

Who knows….. One thing that is certain, the Phoenix market can not, and will not sustain the appreciation rates we’ve seen in the past year. I’m not an economist, I don’t pretend to know everything about what moves the real estate market. But one thing I do know–we won’t see 50% appreciation rates year after year. It just can’t keep happening.

Just do the math…

FOR EXAMPLE (and it’s only an example!!)

Say the appreciation rate is 50% and stays that way for five years.

You buy a home in 2003 for $200,000
In 2004, that home would be worth $300,000
In 2005, it’d be worth $450,000
In 2006, it’d be worth $675,000
In 2007, it’d be worth $1, 012,500
And in 2008, it’d be worth $1,518,7500

Sorry, but the rest of the economy (including your paycheck) simply isn’t going to support a home increasing in value from $200,000 to $1,518,750 in five years.

It’s completely unrealistic to expect our local appreciation rates to continue to increase at this rate.

Look at what the monthly payments on the above example would be:

The $200,000 home in 2003 would cost you (roughly) $1,200 a month.
The $300,000 home in 2004 would cost you (roughly) $1,800 a month.
The $450,000 home in 2005 would cost you (roughly) $2,700 a month.
The $675,000 home in 2006 would cost you (roughly) $4.050 a month.
The $1,012,500 home in 2007 would cost you (roughly) $6,075 a month.
The $1,518750 home in 2008 would cost you (roughly) $9,113 a month.

And that’s if interest rates stay as low as they are right now.

A lot of people can afford a $1200 a month mortgage right now. How many can afford to pay $9,000 a month for a house right now? Think there will be more people that can afford that in five years? Maybe a few, but certainly not enough to support a real estate market.

Basic economics here folks. If the market continues to rise like this, no one will be able to afford a home. If no one buys homes, the prices drop until people can afford it.

So will the bubble “pop”? Depends on how you define “pop”? In my opinion, current appreciation rates are not sustainable. Is that a popping of the bubble? I don’t think so. Some do. I think appreciation rates will drop to historical levels. Since 1968, home prices generally have risen between 1 and 2 percentage points faster than the overall rate of inflation. (http://realtytimes.com/rtcpages/20051116_appreciation.htm)

Long-term statistical averages have a way of evening out. (Hence the term “average”). Home ownership is a great investment. In addition to appreciating in value, you get tax benefits (at least for now…) and you get the satisfaction of owning your own home. It’s hard to put a price on that. And no matter what happens to this “bubble” (or the tax laws), home ownership will continue to be a good thing.

I’ll close with one more math example:

I bought my home in 1999 for $180,000. Today I could sell it for $400,000. Of course to live in a similar home, I’d have to pay $400,000 for a new one. Trading in my mortgage payment on a $180,000 loan for a $400,000 loan payment is not appealing to me, At all. But it’s nice to know my investment has grown. If the value of my home DROPS by 10%, my home will “only” be worth $360,000. But look again at what I paid for it… if the value of my home drops 10%, it will still be worth TWICE what I paid for it 6 years ago. I willnot have “lost” $40,000, I will have gained $180,000 in home value.

Doubling your money in six years is an incredible investment any way you cut it.

So don’t freak out if home values drop a little (and they just might). Look at the TOTAL picture. And keep in mind that even if values drop, they are almost certain to rise again…

Go to ThompsonsRealty.com

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