The Blog

The House Bubble?

America's real estate markets are rocketing skyward: Disaster or boon for home-owners?

12:00 AM, May 31, 2005 • By IRWIN M. STELZER
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Perhaps most important is the strength of the underlying demand for houses. Newcomers to America are providing a boost to demand at the "starter home" level. More affluent Americans are buying second homes. A jobs market that has created new jobs for 23 straight months is giving consumers confidence and, equally important, paychecks with which to pay for first or bigger homes. Those paychecks have benefited from unexpectedly large increases in worker income: up 10.4 percent in the fourth quarter of 2004 and 6.9 percent in the first quarter of this year.

Does this mean that perpetual double-digit increases in prices are assured? Certainly not. Does it mean that prices might never decline? Of course not. They will react negatively when mortgage rates rise significantly. Will some homeowners who are over-extended find themselves in financial difficulty, and face foreclosure? Very likely.

But for most homeowners, a decline in the value of their homes would only reduce the gains they have made since purchase, and perhaps make them rein in their borrowing as they feel less rich. They will still have the same place in which to live, and if they plan to trade up, or down, will find that although they can get less for their house, they will pay less for the house they buy. In short, there is life even after a bubble. After all, the bubble burst, but we still have the Internet.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.