Is 2013 A Real Estate Bubble?

Many people worry that locally, the real estate is going through another “bubble” of high prices that won’t continue.

A simplified view of the economic downturn in 2008 is that it was the result of:  a government policy which tried to expand home ownership to people who could not otherwise afford to own a home, and even more so to financial institutions which were not adequately policed. Political pressure was put on Freddie Mac and Fannie Mae to encourage loans to low income people who previously would not have been able to buy a home. Lack of oversight allowed financial institutions to sell loan investments while making them look like a safer investment than they were. When the scheme broke its affects were very wide. Now that a partial recovery has taken place, look at where the real estate market is. Locally those homes in areas where the average price is below $700,000 have not regained their values to where they were in 2007. In areas where average home prices are higher, values have surpassed the 2007 peak. This is consistent with the extra political aid provided to the lower levels that is no longer given. Currently both home buyers and home sellers are being helped by the low interest rates heavily influenced by political decisions.

In 2000/2001 there was another rapid growth in home prices followed by a rapid drop. Local companies involved in internet marketing were very highly valued. Their employees had greater wealth and better prospects. The investment community over rated the value of many of those companies. Additionally this period was at the end of the Enron disaster. When Enron collapsed about 15,000 Enron employees lost their jobs and what appeared to be their large retirement accounts. Roughly 85,000 Arthur Anderson employees also lost their jobs. Almost $100 billion of claimed Enron assets no longer existed. What affected California especially strong was Enron’s manipulation of the electrical power market. Partial deregulation prevented local power companies from charging “market rates” but required them to buy electrical power during periods of high demand at whatever price was available. Enron withheld electrical power, by making the power appear to be sold to out-of-state buyers, then sold the power at the unregulated spot market price. The legal issues are still being fought. On Aug 17, 2013 British Columbia power agreed to pay $750 million to end the lawsuit brought against them for their involvement in the market manipulation. The partial deregulation and manipulation caused the bankruptcy of Pacific Gas and Electric in 2001. Over $4 billion dollars has been returned to investors as the result of the law suits.

Currently there is limited exuberance for real estate investments. Most people are still very concerned about the economy. Nationwide home prices are still on average well below the 2007 peaks. The demand for real estate comes from two factors. The low interest rates make it cheaper to own a home for approximately seven years rather than to rent it for seven years. The low prices in many areas are judged by investors as being over depressed by the downturn in the economy. Although mortgage originators had much greater sales of refinance loans there does not appear to be any organizations who otherwise gets special benefits from the low interest rates.

There is political pressure to go back to a “free market” economy. President Obama is in his last term. Whoever becomes the next president may decide to demonstrate his leadership by dramatically changing policies, possibly causing major economic problems. Again nationwide housing prices are still below their peak values. A change in national policy which leads to economic problems would probably be caused by poor judgement rather than the major market manipulations done in the past to take billions of dollars.

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