Magazine article Real Estate Issues

Editor's Statement

Magazine article Real Estate Issues

Editor's Statement

Article excerpt

THE "BUZZ" IN THE GENERAL PRESS ABOUT THE REAL ESTATE INDUSTRY can be summed up in a phrase: "the bubble." Having experienced a collapse in commercial real estate prices as recently as the early Nineties, and with a wariness honed by the "tech wreck" that triggered the stock market decline precipitated by the dot-com "bubble," the concern is understandable. There is plenty of controversy surrounding the subject; the situation is far from certain. That makes it an "issue," and an apt subject for our journal.

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Dr. Damir Tokic's article tackles the question head-on, and concludes that as far as housing is concerned a bubble does exist, and that only low interest rates are preventing price inflation based upon speculation from imploding the market. He specifically looks at the dot-com catastrophe, and warns that "many experts and a few influential academics argued that a dot-com bubble did not exist. Needless to say, billions of dollars were lost as technology stocks plummeted March 2000."

As editor, I commend Dr. Tokic's analysis for your consideration--though I'm personally skeptical about the appropriateness of the dot-com model for real estate. On the housing side of our industry, readers might want to look at a couple of research papers published by the Federal Deposit Insurance Corporation, an agency that has a critical interest in a collapse that would impact home mortgage repayments. The FDIC's website, http://www.fdic.gov/bank/analytical, will bring you to a first quarter 2004 paper entitled, "Housing Bubble Concerns and the Outlook for Mortgage Credit Quality," and a second quarter 2005 paper, "U.S. Home Prices: Does Bust Always Follow Boom?" The first FDIC paper notes at least five key distinctions between the tech wreck and housing appreciation trends: the "utility" of the house (if all else fails, live in your asset!), high transaction costs to sell a home, tax advantages of homeownership, the breadth of homeownership as a stabilizing factor, and the intangible social benefits derived from owning rather than renting. The second FDIC piece notes that past housing booms have more frequently ended in a plateau of pricing than in substantive, sustained price declines, and that "busts" are most often the consequence of local economic shocks--such as the "rust belt" and "oil patch" crises in the 70s and 80s--than in housing price trends per se. …

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