There is even more discussion about the real estate bubble, especially since Fed Chair Alan Greenspan warned of housing “froth”. SmartMoney magazine recently ran a bull vs. bear debate on the topic. The bulls make the familiar argument of low interest rates, strong demand, low inventory levels, limited land supply etc. The bears, on the other hand, point out that when rates eventually rise, housing will be hard-hit.
The best discussion of the bubble I’ve seen so far is this SmartMoney column by James Stewart. He suggests that we should consider housing not as an investment, but as a consumer durable necessity. Of course, this only applies for owner-occupied homes and not to investment properties.
Take my own situation: We lived in our own home purchased more than two years ago. We have a significant equity in our house. If we sell now, we have to rent someplace and wait for the housing market to crash. That could take years or not happen at all. Meanwhile, we would be giving up a significant “imputed income” we derive from our current house and incur all the frictional costs of selling and then buying a house. So, we are staying put but staying away from any real estate investments.