IS THIS A BUBBLE?

It’s been an extraordinary year in real estate, and the American dream of
owning a home emerged as vibrant as ever.

Home sales have made enormous gains in 2013. Our Elliman Report* for
the second quarter showed that Manhattan home sales leaped 18.8 percent
ahead from the previous year, bolstered by customers from all over the world.
In the Hamptons, sales made even more spectacular gains, up 25 percent in
the fi rst quarter, to reach a seven-year high. Our Douglas Elliman offi ces in
South Florida report the number of sales in Palm Beach skyrocketed by a
mindboggling 56.4 percent. And in the Miami area, one of the hardest-hit by
the recession, average prices were up by 25.8 percent—with nearly two-thirds
of all sales paid for in cash. Buyers are so hungry for housing in the Miami
area that over 50 new condominium projects are in the pipeline for the coming
year.

It’s not just a few specialized markets that are experiencing a robust recovery.
Nationally, home prices have risen over 12 percent in 20 major markets
since last year, and economists say prices could appreciate even more before
the end of 2013. In some markets, the competition between buyers is so great
that bidding wars and no-contingency offers are back.

All of which leads many to ask me, “Is this a bubble?”

The answer is no. A bubble is when prices are infl ated beyond true value.
What we’re experiencing now is a correction toward more normal values.
Even with all the recent remarkable gains, home prices remain 26 percent
below their peak prices—lower than historic norms. The economic downturn
left housing prices unreasonably low and undervalued, and home prices
are climbing quickly not because it’s a bubble, but because there is very little
inventory on the market. While renewed consumer confi dence and low
mortgage interest rates brought buyers fl ocking back to the market, sellers
were holding on to their homes until they went up in value—or because they
were underwater on their mortgages or are in foreclosure.

In the second quarter of 2013, the Elliman Report shows that listing inventory
in New York dropped by 31.3 percent. That’s the lowest level of houses
for sale we’ve experienced in the past 12 years. In Palm Beach, the inventory
fell even more, to 39.3 percent. To exacerbate matters, because of new federal
rules aimed at safeguarding borrowers from predatory lending, mortgages
were nearly impossible to obtain, even for some qualifi ed buyers. Also,
appraisals didn’t keep up with the upturn in the market and came in low,
hurting people trying to get fi nancing. Now that homes are being priced
more realistically, appraisals are coming in line with market value, and banks
are loosening their lending standards.

This accelerated pace of gain won’t keep up for long. The unusually tight
inventory levels will slowly begin to ease. Double-digit gains in home prices
are predicted to level out to about 4 percent a year in 2014—which is still a
sound return on investment. And although mortgage rates will continue to
rise, most experts predict they will level out at about 6 percent, which is still
a historic low. Tight restrictions on getting a mortgage will also begin to
loosen up and level the playing fi eld. Keep in mind that prices are low relative
to rents, and even at 6 percent interest, it will still be more than a third
cheaper to buy a home than to rent, on average, across the U.S.
So relax. It’s not a bubble. It’s only a sign of more good things to come, and
that now is an excellent time for both buyer and seller to be in the market.

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