Bubble or Not?

Every real estate market is different. To suggest that it is possible to predict the behavior of our local real estate market based upon what is occurring in San Diego, Las Vegas, or South Beach, FL is like predicting Walnut Creek’s crime rate based upon recent crime statistics from Detroit.

Over the last several months, the proliferation of “housing bubble” articles has reached a feverish pitch. “Experts” from all corners of the nation have raised concern over the market’s health, and the media has fueled these fears by running alarmist headline articles. Many of these “experts” have been predicting the collapse of residential real estate for several years, only to find that they have been totally out of touch with the market and its economic drivers.

Real “bubble” or not, people buy and sell their homes with strong emotion. If you hear something often enough, it can impact your behavior, regardless of its factual basis. Fear can have a profound impact on an otherwise healthy market. Given the far reaching implications to a population that is economically tied to the strength of our housing market, it is imperative that a balanced, informed perspective of the market is communicated.

The relative health of a market is determined by the demand for the “product” and its value proposition versus other buyer alternatives. Demand is determined by the number of buyers and their ability to pay a product’s market price. Within the Bay Area, buyers have numerous housing alternatives with extreme differentials in pricing. The relative value of a housing market is closely tied to its proximity to economic centers, transportation, weather, schools, and various subjective factors that translate into quality of life.

Those calling for the demise of our local market fail to take into consideration numerous critically important components that contribute to its health. Home prices in this market have historically been undervalued relative to comparable alternatives in Marin, San Francisco, or the S.F. peninsula. As the economic strength of Walnut Creek and the San Ramon Valley has increased, it has bolstered housing values. This has resulted in a process of local price normalization relative to comparable Bay Area housing. Commercial real estate markets have already led the way. Lease rates for Walnut Creek office space are among the highest in the Bay Area, and vacancy rates are among the lowest. The strength of our housing market is a logical outgrowth of this area’s economic health. Technology has also enabled today’s workforce to be productive without physical ties to particular geographic work location. This trend will continue, encouraging workers to seek housing in our market area rather than be physically tied to more expensive housing markets. Increased energy prices will also discourage physical commuting and provide further momentum towards geographic work independence.

Other fundamental drivers of our local market are its economic diversity and the shortage of available, quality housing inventory. Markets are driven by simple supply and demand. The supply of new housing in our area is severely constrained by the shortage of land for new construction. As a result, the supply of housing “product” remains almost static while demand continues to grow for this area. Speculation in this market is extremely low, therefore prices accurately reflect buyer demand -- in stark contrast to areas such as San Diego County, Las Vegas, etc. where prices have been artificially inflated. Our local market is also economically diverse. It draws from the economic centers of San Francisco, Walnut Creek, and the growing biotechnology and information technology companies of the San Ramon and Pleasanton/Livermore areas. This diversity served our market well following the dot.com plunge and “911”; and will continue to provide strength and stability in the foreseeable future.

On a macroeconomic level, the strength of our market has been fueled by historically low interest rates and confidence in real estate investment over the stock market. Given the stock market’s performance this year, it’s hard to argue that it will soon emerge as a better alternative to owning real estate, even with a tighter monetary policy. In economic terms, we have an extremely flat yield curve – where the differential between short and long term interest rates is minimal. This will bode well for the housing market where mortgages are typically tied to long-term rates.

Our local markets have been moving up at double-digit growth rates for many years. In fact, many local areas have shown year-over-year median price appreciation rates close to 20 percent. Those growth rates are not sustainable, nor would they be beneficial to the long-term health of our real estate market. We are beginning to see more cautious behavior in the marketplace by buyers who are fearful of a “bubble” or because steep price appreciation is negatively affecting affordability. It’s also clear that many homeowners have accelerated their plans to sell, based upon “bubble” fears. This has recently inflated inventories and decreased price competition.

So, what are the implications for local real estate? I believe that we’ll see a gradual flattening in appreciation rates and some seasonal softening in pricing, which has already commenced in the upper 30 percent of the market. The tapering in appreciation rates will move into the median price range of the market, but will be less pronounced. Sales cycle times will increase as we move from a seller’s market to a more normalized one. The sale of homes will take more commitment and a much greater skill level from the seller’s agent. The days of an agent simply putting a house on the MLS, collecting multiple offers, and then moving on to the next house are gone. The real estate professional’s ability to strategically utilize a wide range of media, information technology, and demographic marketing becomes extremely important to the seller seeking maximum value in a more competitive marketplace. We’ll see a “soft landing” in the housing market, not an exploding “bubble”. This process should unfold during the seasonally slower market in the months ahead, but then bounce back with renewed strength as we move into spring 2006. Much will depend upon how much inventory is absorbed during the coming months. Overall, the market will remain healthy with a more historically "normal" relationship between buyers and sellers. Only the “bubble” theorists will be disappointed.


Ron Rothenberg is a licensed real estate agent with Intero Real Estate Services. He holds an MBA degree with an emphasis in marketing and finance. He can be reached at 925.253.7075 or via email at Ron@TeamRothenberg.com.