Mortgage broker stockton california

WHILE most mainstream economists argue that a recovery will buoy U.S. home prices, some think that bubbles are forming, in California and elsewhere.

A bubble occurs when underlying economic factors, such as personal income growth, are ignored by speculative buyers. Prices eventually come down when the market falls in line with local economic conditions.

Yet the real estate industry and buyers in demand-driven markets on both coasts consistently deny the possibility of bubbles forming.

"There is no bubble here," said Michael Beam, an agent-broker with Coldwell Banker Hunt Kennedy, a real estate agency in New York. "There's low inventory and high demand. Buyers are out in force and I'm seeing bids of $50,000 over the asking price on certain properties."

It's easy to believe that housing prices will continue to soar. The median home price rose 7.5 percent in 2003, the best year since 1980, on record U.S. volume of 6.1 million home sales, according to the National Association of Realtors.

Don't dismiss the bubble possibility just yet, though. One of the prime traits of a bubble is the widespread belief that prices will ascend indefinitely, so minority views are worth a listen.

A new study titled "Is There a Bubble in Housing?" by Michael Youngblood, director of research for GMAC-RFC Securities, compared prices in 318 markets as of September 2003 with the local economic conditions that triggered past major housing declines.

Youngblood found that bubble conditions exist in 29 markets, representing 10 percent of the U.S. population. The bubble-prone markets, in Youngblood's view, pose a danger because the "rate of change in house prices exceeds the rate of change in personal income."

Possible bubbles

According to Youngblood's report, "house prices are in equilibrium for the majority of the U.S. population." But in the coastal markets, there were signs of "speculative excess."

Some of those markets include New York City and adjoining Nassau County on Long Island, along with nearby Monmouth County, N.J.; Miami and Ft. Lauderdale, and Boston.

In California, the regions that showed up on the radar included Orange County, Chico, Modesto, Oakland, Riverside, Sacramento, Salinas, San Diego, San Luis Obispo, Santa Barbara, Santa Rosa, Stockton and Vallejo.

Barring any negative economic surprises or huge interest-rate increases, it's unlikely most U.S. homebuyers who plan to stay in their homes for several years will get stung by a home-price decline. Still, homeowners should be cautious before entering into an adjustable-rate mortgages, in case interest rates rise.

As builders become more aggressive in a higher-mortgage-rate environment, they will offer either no-money-down or interest-only loans.

So far, locally based builders such as Ryland Group Inc. and KB Home have shown resilience, although they remain sensitive to interest-rate fluctuations. Shares in both companies fell, for example, in late January, when the Federal Reserve shifted its stance on the timing of future interest-rate adjustments.

Calabasas-based Ryland, trading at $78.63 as of Feb. 10, was down 11.2 percent year to date. KB Home, based in Los Angeles, was down 5.5 percent, to $68.30.

Much of what Youngblood and other real estate "bubblistas" observe should be tempered by a number of positive economic events.

Mortgage rates, which have partially fueled real estate sales over the past three years, are projected to remain below 7 percent this year.

The economy--as measured by gross domestic product--is growing at a reasonable 4 percent annual rate. The Congressional Budget Office has also predicted that the unemployment rate should drop to 5.3 percent by 2005.

"There is no bubble in housing," said David Lereah, chief economist of the National Association of Realtors. "We have a supply problem in this country, not a demand problem."

The most visible fly in the ointment for home prices is job creation. Some 3 million jobs have vanished in the past three years. In the January jobs report, 112,000 new jobs were created--well below estimates.

Local unemployment weighs heavily on real-estate markets. If there are no new jobs--or major employment declines in an area--that often depresses local housing prices.

Diane Swonk, chief economist for Bank One Corp. in Chicago, however, is optimistic about job growth and its impact on real estate markets. While she sees home price increases slowing down this year, Swonk says, "We'll see generally many more jobs and paychecks. The worst overpriced markets such as Silicon Valley have already gone through corrections."

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