Michael K. Evans on The Bubble

Michael K. Evans writing for Industry Week in an article titled 'Evans On The Economy -- Ignore The Bubble Babble' writes: "U.S. housing prices, on average will rise 2% to 3% next year, the same as the rate of inflation. In 2007, they will rise 4% to 5%. These projections are obviously well below the average rise in housing prices of the past four years" We will see if you are correct. U.S. housing prices in the bubble markets will see price declines. I expect the average US average home price will fall slightly between 1 - 3%. Many, areas in the country are not in a housing bubble.

Evans continues and writes "the bubble-bursting scenario being put forth by many alarmists." Most os us bubbleheads are no alarmists, but rather realists. The tremendous price appreciation seen in the past 5 years in the bubble markets is unsustainable. Prices will decline. In California home prices " have more than doubled since late 2001, increasing pressure on home buyers, who needed a minimum household income of $133,800 to buy a home at the August median price of $568,890, the California Association of Realtors said in its report. That meant that only 14 percent of households could afford the typical home, down from 18 percent a year earlier, and the lowest level since records began in 1989, the report said (Reuter, Oct 6th).

Some people would argue that while national average prices won't decline, there will have to be some sharp corrections in the areas of the country where prices have doubled over the past four years. Maybe that's true in Las Vegas. But looking at prices in the other areas that have posted 100% increases -- Boston; New York; Washington, D.C.; South Florida; Los Angeles and San Francisco -- we find basically the same phenomenon. High housing prices have caused many people to move to the outer fringes of these areas, with commutes of an hour and a half to two hours each way no longer uncommon. Suppose that housing prices in closer-in areas did start to decline, either because would-be buyers decided they couldn't afford the asking prices, or existing homeowners started defaulting on their funny-money mortgages. There is an enormous reserve of buyers just waiting to snap up these properties and reduce those tortuous commutes. As a result, prices will decline hardly at all even in these currently "overpriced" areas.

It is certainly true that if home prices decline in the inner areas of metropolitan areas some people in the outer areas will buy. However, if home prices fall in the inner areas prices will be falling in the outer areas as well because these housing areas are competing against each other for buyers.

The one thing that could cause the U.S. housing boom to end, and prices to decline, is sharply higher interest rates

Interest rates are rising considerably. According to Bankrate.com " Mortgage rates rise for seventh straight week."

While they will slow down, an actual decline in price -- except perhaps in gambling capitals -- is simply not in the cards

We agree about Las Vegas home prices. However, next year we will be seeing actual price declines in may other markets including NYC, Philadelphia, Baltimore, Bakersfield, San Francisco, LA, Boston, Miami, Jacksonville, Tampa - Saint Petersburg, Bradenton, San Deigo and others.