What Everybody Ought to Know About the Housing Bubble.

Our country is still concerned about the "Housing Bubble". Mark Cuban‘s cool new search engine Icerocket.com has a Blogs Trend Tool that illustrates the web still averages over 76 blog posts per day about the housing bubble over the last 3 months. Nationally, the concern over the Housing Bubble still frightens many, but here in Atlanta most of my colleagues and contacts are confident in our local housing market.

I stumbled across this research study today and although it is a bit dated (2004-2005), I think the findings are still relevant in today’s market and should encourage everyone to believe in Atlanta’s housing market.

Home Price Analysis for Atlanta-Sandy Springs-Marietta
By the Research Division of the National Association of REALTORS®

Executive Summary
With home prices rising strongly in most parts of the country, there has been widespread media coverage on the possibility of a housing market bust. A thorough analysis of the Atlanta-Sandy Springs-Marietta metro market, as detailed below, reveals that there is very little danger of this. In fact, the local housing market is in good shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run.

The Atlanta market has very favorable home price-to-income ratio and even better mortgage servicing cost-to-income ratio. The latter ratio is currently below the local historical average. It implies no widespread financial overstretching to purchase a home in the region. Any respectable gains in the local job market will translate into substantial home price gains.

Price Activity
• The current price of $166,500 is 20% below the national average.
• The median home price rose 3% in 2004 and 14% in the past three years – one of slower appreciating areas in the country.
• Among the large populated centers, Atlanta is one of the most affordable places to live.

Additional Discussion Points
• Home price declines are very rare. In fact, the national median home price has not declined since the Great Depression of the 1930s. Stock market collapses, the OPEC oil crunch, economic recessions, and even wars have not negatively impacted national home prices since the 1930s.

• There have been few times when local prices declined. In nearly all these cases, the price declines were accompanied by sharp prolonged job losses. It is difficult to foresee a price decline in a job creating economy.

• Homes trade far less frequently than financial assets (about one home sale every 7 to 10 years for most homeowners). There are also larger transaction costs associated with selling a home due to the lengthy careful examination demanded by home buyers and sellers. Therefore, home prices are not prone to fluctuations as in the stock market. There are neither panic sells nor margin calls associated with homes.

• Many non-quantifiable factors could be important for this metro market in determining home prices. Access to cultural life, the quality of museums, nearby local and national parks, water views, exclusive neighborhoods, weather, the international airport, city vibrancy, restaurants, and a host of other non-quantifiable factors could have an important influence on the overall pricing.

• There are immense tax benefits to owning a home. These tax considerations were not considered in the analysis. For example, the 1998 law permitting primary owner occupants to trade down without having tax consequences. Also most home sales results in no capital gains tax. In addition, long-term capital gains tax rates were reduced in 2003, thereby providing higher return for home investors. These positive benefits, if accounted for in the analysis, would have shown an even stronger case for housing fundamentals in supporting home prices.