Will a Bursting (Housing) Bubble Hurt You?

Hot, Hot, Hot... "Real Estate Gold Rush," Fortune's recent cover blares out. "Riding the Boom," its feature story, is sub-headlined,"They snap up real estate, flip it, then chase the next hot market. They're the new day traders -- and they're dancing on the edge of a volcano." (May 30, 2005)

Housing prices are up an average of 50% over the past five years. "Economists say today's debt-fueled investment binge in real estate is fanning the flames of an already overheated housing market..." (Wall Street Journal, May 23, 2005)

Whoa. Do you hear echoes of the dot-com bubble bursting? Last year interest-only loans accounted for 31% of all U.S. mortgages (up from 1.6% in 2001). In some markets it's even higher, accounting for two-thirds of all loans in the San Francisco Bay Area, warns Thomas Sowell. (Wall Street Journal, May 26, 2005)

"The value of a house, like the value of any other asset, depends on its prospects -- and those prospects obviously look better before a bubble bursts. ... How much of a decline and how far the repercussions extend, if and when the bubble bursts, is the big question."

Meanwhile the chief economist of the Mortgage Bankers Association, Douglas Duncan, expecting "significant reversals" in strong regional housing markets, prepares to sell his Washington D.C. home, saying, "I'm going to rent for a while." (Los Angeles Times, May 29, 2005)

Remember Alan Greenspan warning about "irrational exuberance" in the stock market in 1996? Here's Greenspan now speaking in a similar code about the housing market, "Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern.'' (New York Times, May 21, 2005)

So if current levels of price appreciation are "unsustainable" and the bubble bursts, will it affect commercial real estate? How are you preparing for it?

--Peter Pike