Understanding Real Estate Bubbles

One can use national stats or even regional stats to explain a real estate bubble. To truly define a bubble is to truly define a specific area of the country down to a comparatively microscopic level.

Having lived in Dallas Texas most of my life, it’s easy to use Dallas an example, and it happens to be a prime example. Even today Dallas has some of the cheapest real estate of any large city. Oddly, our lot sizes are smaller than most other areas, as if we have some shortage of land.

Being in real estate for some 18 years I’ve seen it’s ups and downs. A Bubble can be formed due to the old real estate adage ” location, location, location.”

There is another recipe that it takes to build a bubble, start with a little frenzied media, add a dab of movie stars and Celebrities, a pinch of lack of land in which to build, a cup of sandy beach, an eyeful of a city view, a bit of a city that doesn’t sleep, and voila, people pay as much as a seller wants and values rise.

Like a cake that falls in the oven if it’s disturbed too quickly, economic undulations shake housing markets and is the sole example for a market that rose too fast. When economic downturns occur, the owner no longer can afford the house which he paid for based on an area instead of the construction and size of the house.

It’s easy to figure what a house is worth if they are alike is style, year built, size and lot size. But when location brings a higher price for the same home, over time a price bubble occurs.

Take for example if you will, Yellow Stone park. It spans about 100 miles and is truly the top of a super volcano, but it doesn’t look like a volcano as we know it. It doesn’t erupt in a huge explosion that would equate many times of a nuclear bomb ( at least not in 75,000 years ), instead it steams and guessers at a steady pace.

This is basically the form real estate takes. States that have the big booms have big bursts of bubbles. States that slowly steam ahead in a steady pace have no big booms and explosions and conversely no big bubble bursting either.

Steady is the order of the day to avoid bubbles, however that cannot be done on purpose. Supply and demand can easily force a bubble, that is just the reality of real estate.

Texas cities have at best 4% rises in values per year. Some cities in states like California and New York have increases of 50% plus in areas per year. These areas have been to the point that prospective buyers of a property will resort to sending pictures of the family, pictures of the family pet and gifts to get their offer even considered. In short, any explosion will eventually have an implosion. It’s evident in history, nature and in real estate.

An added note,the market is also seasonal depending on the weather, you can’t show a house in a snow drift or pouring rain. It leads me to wonder if Real estate agents in Michigan attach a snow plow to their Cadillac’s in the winter for money.