The very low mortgage interest rates have made housing more affordable and fashionable than at any other time in recent history.  As more families can afford to buy, the demand for housing has increased steadily over the past two years.  This increased demand has led to an escalation in values across the country that range from low of 8% in the Midwest to a high of over 11% in the Northeast since 12 months ago, according to the National Association of Realtors.  In many desirable areas the increase has been even greater.  This has led to discussions about a "Real Estate Bubble" that could "burst" bringing down home values across the board thereby swamping the banking and mortgage industry in red ink.

I have noticed that these articles are usually written by people who favor securities investing and I find myself wondering what the agenda could be when they discuss real estate as though it was a stock portfolio.  The only factors affecting housing are money supply, the cost of borrowing, a growing population, and physical disaster such as earthquake, flood, or September 11, 2001.

The law of supply and demand is one that cannot be amended or repealed.  We discussed last month the huge supply of money available now.  The economic conditions make it inconceivable that rates will increase radically.  So far the US population shows no sign of slowing its growth much less reversing.

The current increase in home pricing is due to the following factors:

            1)  More people can afford to buy because financing costs are low.

2)  Because of low interest rates, house payments even with interest, taxes, and insurance are cheaper than rent.

3)  Because everyone must be somewhere, each homeowner becomes an ex-renter leaving a vacant rental behind.

4)  As more landlords compete for available tenants, the rents drop or the qualifying criteria drops.

5)  As vacancy increases or income drops, more rental units are placed for sale providing supply for the new homebuyers or move up investors.

6)  Eventually this causes a shortage of rental units and rents start to increase, the qualifying process tightens.

7)  As all tenants that can qualify or desire to own have moved, the demand for housing eases and prices stabilize.

8)  As interest rates rise, demand softens and prices stabilize.

9)  As prices stabilize, the investor dollars remain, because the rents will begin to rise and cash flow increases.  The speculator dollars leave the marketplace as they count on "buy low-sell high".  Speculators are not interested in income-only gains.

The real estate market is cyclical but cannot react to influence or rumor like the stock market because:

1)  There is a limited supply of developable realty and an increasing population that creates demand.

2)  No one can corner the market.

3)  Supply always occurs months after the demand because it takes months to create housing.

4)  Acquisitions are always limited by the money supply and cost of financing which reduces speculator activity.

5)  As demand eases and prices soften, marketing time increases and banks start to reduce development lending so supply is reduced.

6)  Investors look for cash flow and thereby tie income production to value and consequent pricing.

The only time you need to worry about "bubbles bursting" is when the sales prices are no longer related to the income production of the property.  I'm happy to report that it is not true in Nevada today and the only "bubbles" bursting are in the champagne!  Cheers!!!