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Is a Housing Crash Imminent? No

The Investment U E-Letter: #348
Friday, June 25, 2004

Is a Housing Crash Imminent? No
By Dr. Steve Sjuggerud
President, Investment U

With a dead year in stocks, bonds, commodities, currencies – you name it – people have been turning to real estate

Prices from coast to coast have been soaring. Prices are up 26% in the last year in the entire Los Angeles area. And they’re up 22% in Miami.

The June 3 issue of The Economist magazine predicts a fall in worldwide housing prices “Australia’s housing bubble could be the first to burst. It won’t be the last,” the magazine reports.

“The drop in house prices in Australian cities undermines a popular argument heard in Britain and America that even if house prices do look frothy, they are unlikely to fall unless there is a big rise in interest rates or a jump in unemployment.

“Neither has been needed in Australia. Interest rates have risen by only half a percentage point during the past year, to 5.25% – less than half the level during the previous housing downturn in 1990. Meanwhile, unemployment is close to a 20-year low.”

The Rise in U.S. House Prices Doesn’t Qualify as “Crazy” – Yet

Home prices need to fall by 20-30% in Spain, Britain, the Netherlands, Australia and Ireland, the magazine says. Home prices in four of the five countries above have risen more than 100% since 1997. Based on the statistics, the U.S. has not experienced the same crazy climb yet. U.S. home prices have risen at a rate of 7% a year from 1997 to the present. That is faster than any time in recent history but it is hardly a “bubble.”

Based on the statistics alone, and I still believe what I told readers of my newsletter last month: “The fundamentals in the housing market that I’ve written about for years are still in place. With the extremely low mortgage rates, real estate is still ‘affordable,’ when you compare monthly payments to family incomes I expect real estate to continue higher”

However, something is changing. I can’t explain it – it’s not showing up in the data yet. But we all know prices are getting crazy out there

As an example, just last week my next-door neighbor just put a “For Sale” sign in his yard. My wife took one of the flyers on the sign. She told me: “They’re asking more than twice what we paid for our house four years ago”

Our house is bigger, and (I’d argue) nicer, too. If that guy gets close to what he’s asking, the “value” of our house would have grown by significantly more than the 7% a year the government statistics suggest.

Real Estate Rising… To Another Nasdaq-Like Peak?

Right now, real estate is catching up to the rest of investable assets. The fundamentals aren’t like the Nasdaq back in 2000, yet, based on the government statistics.

But with very little excitement lately in the rest of the world’s assets, real estate will likely keep rising and real estate values may end up like the Nasdaq someday soon

In the 1970s – a period of bad times in stock prices, and rising interest rates and inflation – home prices nearly doubled in six years. Could home prices continue to rise right now, when no money is being made in stocks and with higher rates coming? The answer is yes

I’m concerned, of course. But home prices could still rise from here

Today’s IU Cribsheet

Good investing,

Steve

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