Editor’s note: The Washington, D.C.-based Center for Economic and Policy Research is sponsoring an essay contest on “Why there is no housing bubble.” The winner will win $1,000. Send a copy of your entry to contest@inman.com for possible publication on Inman News.

I am a commercial real estate broker and an investor in multifamily and commercial properties. I am entering the Center for Economic and Policy Research’s contest, although I guess I won’t win because as I am not in disagreement with some aspects of the center’s position that there is a housing bubble.

I find the most room for argument in the statement: “No one has yet produced a remotely plausible explanation of how fundamental factors can lead to a run-up in home sale prices, but not in rental prices.” Actually this is simple. To start, let’s look at real estate market values as being composed of two components, one being functional value and the other being speculative value.

Functional value is what a property is worth today based solely on using it. Functional value can be derived directly from fair market rents and can be calculated as a function of net operating income and a reasonable capitalization rate.

Speculative value is what someone is willing to pay over today’s functional value based on the expectation that someone else will be willing to buy it for more tomorrow. This is how we inflate the bubble.

So in a given property there is a functional value, and if the actual market value is greater, a speculative value as well. (The speculative value could be a negative sum if the market value of the property were lower than the functional value.)

In single-family homes in many parts of the country today, rental rates have not kept pace with sales prices because of the speculative value component in the market value. This is part of the bubble.

There are several factors at work:

With interest rates low, many people who would otherwise rent can now afford to buy. All these new buyers add to demand, which pushes upward on prices. The same low interest rates also increase the prices existing owners can pay for their next home. As lower interest rates push home prices upward, the speculative value component keeps them moving upward. The thinking is that it’s okay to pay more if you know values will keep rising and that becomes a self-fulfilling prophecy. The same low interest rates that turn renters into buyers allow others to purchase second homes as rental investments, increasing the supply of rentals even more. Increasing the supply pushes rents, which are based on functional value, even lower.

Given this, buying quality rental properties that have little or no speculative value built in to the price, i.e., properties with cap rates of eight or more seems to make sense. When interest rates rise and the residential bubble bursts, a lot of people will be driven back into renting and the yields and functional values of rental properties will rise.

So, yes, there is a partial real-estate bubble, and when it bursts, that will benefit other types of real estate, namely multifamily and single-family residential rental properties.

Johann Robbins is a broker of Investment & Commercial Real Estate Preferred Properties in Bayfield, Colo.


Send a Letter to the Editor for publication.
Send a comment or news tip to our newsroom.
Please include the headline of the story.

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription