BOOMS & BUSTS...

The Inman News article details the sky-rocketing home prices in the United States and the FDIC’s report titled, “U.S. Home Prices: Does Bust Always Follow Boom?” The five year increase of almost fifty percent overall and the greatest increase in any year during 2004, has real estate practioners, economists, and consumers wondering if a bust will follow this boom. The FDIC defines a “boom” as a thirty percent or more increase in inflation-adjusted home prices during any three year period. A “bust” is defined as an inflation-adjusted price decline of fifteen percent or more in five years.

The article points out that sixty-three U.S. metropolitan areas have had at least one housing boom since 1978. In the last twenty-five years, twenty-one cities have experienced a “housing bust.”

The article presents case studies of housing booms and busts in the Mid-west, Northeast and California. The FDIC reports that currently no cities are experiencing home-price busts and interestingly “only infrequently” do home-price booms lead to busts.

The FDIC does caution that there is more sub-prime lending and higher-leveraged borrowing then ever before. These factors could make a decline in the housing market more likely to become a bust.

Sir Issac Newton first taught us that “what goes up must come down.” Based on the real estate market activity in recent times Maryland and nationally may defy gravity. Short housing supply and a healthy economy are going to continue to keep home prices up for the foreseeable future.