Another look at housing bubbles

Evidence of price trouble appears in some markets
Published on Jan 3, 2005

Recent bursts in property appreciation suggest to some observers that we are in a housing bubble. A bubble is a marked price increase fueled partly by expectations that prices will continue to rise. Once that expectation comes into serious question, the bubble bursts, and prices drop sharply. In writing about this question last year, I pointed out that house markets are much less vulnerable to bubbles than financial markets because the cost of buying houses in order to resell them is very high. Costs include sales commissions on the purchase and sale, and the costs of carrying the property until the sale. But I may have overstated the case. Steep price increases and the expectation of more to come can overcome sales commissions and carrying costs, and there is evidence that this is happening in some markets. One of these is southwest Florida, from where I have recently received many letters. One letter points out that on new construction, it is possible to speculate on a price inc...