Real Estate Bubbles
The 2009 update - The bubble has popped in the highly appreciated coastal markets and some of the inland markets related to them. Where will values end up? That will depend on area, but 30-40% drops from the peak prices are probable, with lenders losing 50% or more of their loan amounts on some properties. June, 2009 is seeing increased activity in Southern California in the lower price ranges, it's likely to be a couple of years before there is significant price appreciation. Look for specific under priced properties, do not count on appreciation to make a profit.
Most everyone will agree real estate markets that have had huge price increases for many years in a row cannot keep rising in price at the same pace as in the past. Other real estate markets have seen appreciation, but at a more moderate pace. A slowly appreciating market is far less likely to suffer a "bubble burst" than a market that has seen huge gains in just a few years time.
So, without relying on statistics provided by media sources, how do we find the appreciation rates in the area you are considering purchasing real estate in? The Office of Federal Housing Enterprise Oversight, or OFHEO, provides statistics based on the sales, or refinances, of individual properties. By using individual properties, OFHEO eliminates statistical variations caused by strengths in either higher end properties or lower end properties in any given market.
You can get to OFHEO's House Price Index by clicking the link. You can compare individual state's appreciation rates, review different Metropolitan Statistical Areas (MSA), or use their House Price Calculator to estimate the current value of an individual property based on a past purchase price and sale date. It's good stuff.
If you are thinking about buying in an area that has had very aggressive appreciation for several years, you'll probably want to be able to either re-sell the property fairly quickly, or hold onto it for many years. The fast resale approach, which shouldn't exceed 6 months, will avoid any major downward price movement as long as you are paying attention to current market conditions. The long-term "buy and hold" approach is always going to be based on the property's ability to cash flow. If you have a positive cash flow, market pricing cycles do not matter, you know in the long run that the loan will be paid down, and your property will eventually appreciate again. Buying a property to hold for a few years, then sell and make a bunch of money probably isn't the best approach right now. However, if you are in an area that hasn't seen explosive price growth, there isn't really any bubble to burst, just invest any way you feel comfortable doing.