Talk of Rising Home Prices Bubbles Over

Times Staff Writer

Jerry Torres is living in fear of the bubble.

Not the frothy, lighter-than-air kind. The real estate bubble, which could burst and wipe out the enormous run-up in value that Southland homeowners such as Torres have enjoyed in recent years. So worried about this happening, he and his wife, Nancy, delayed buying a bigger home in Claremont for nearly a year.

"That bubble has been in the back of our minds for a while," said Torres, 45, an information technology director for a manufacturing firm. "I'm still concerned that down the road the real estate market will take a dive."

For many, the housing bubble has become an obsession -- the subject of endless conversation and debate among homeowners, economists, media pundits and countless others fascinated with the relentless rise in home prices in places such as Southern California.

Is there a bubble? When is it going to burst?

Michael Greenwald, a Los Angeles real estate agent, says he can't get away from those questions. He tells his clients that he doesn't see the bubble. But if there is one, he quips, "we're just going to see a few pinholes that will quickly get patched up."

To some, all this talk is bubble babble.

"I've been a little frustrated by the discussion of late," said Raphael Bostic, a USC real estate expert who spoke last week at a conference in Century City called the Housing Bubble: Fact or Fiction. "I'm not excited about the use of the word 'bubble.' "

But its everyday use does underscore the deep-seated worries that people have about the one asset that has shown extraordinary growth in value in an otherwise dismal economy. When the final numbers are reported today, Southern California home prices are expected to have jumped more than 16% last year.

With memories of the dot-com bubble on Wall Street not distant, many are concerned about a similar explosion in real estate. Fears also have been stoked by heavy media coverage; publications have run lists of top 10 bubble markets, which usually include San Diego and Orange counties.

Even in areas where the bubble is clearly nonexistent, people can't stop talking about it. Noting that home values in Buffalo, N.Y., have remained virtually flat for a decade, one newspaper in that city wrote that property owners had nothing to fear. "The bubble can't burst if it never got blown up in the first place."

The bubble banter extends far beyond U.S. borders. From London to Seoul to Sydney, Australia, home values have soared in recent years, fueling widespread discussion and concern about the bubble in many real estate markets.

Yet for all the cocktail chatter and hand-wringing, little is understood about housing bubbles. Economists readily admit that they lack the tools to determine whether a bubble in housing prices is forming. Even its definition is open to debate.

More often than not, proof that a bubble exists comes only after it's too late, when values have deflated rapidly or flattened over a long period of time. Most everybody agrees that Tokyo was the classic real estate bubble: Home prices there fell by half during the 1990s.

But there aren't many other examples or undisputed cases. Take the 20% drop in L.A. home prices in the early 1990s. Some economists still contend that the decline was a sign of underlying weakness in the regional economy, not evidence of a punctured speculative bubble.

"There is a sense that more work needs to be done by what we mean by a bubble, how to identify a bubble and how to respond to a bubble," said Mark Zandi, chief economist at, a national consulting firm in West Chester, Pa. "You can identify the preconditions for it and warn people about it, but they would have to do house-to-house searches to see if there is a bubble or not."

In general, some of the telltale signs of a real estate bubble include:

A rapid rise and fall in price that often cannot be explained by economic fundamentals, such as job and income growth.

Widespread speculation as properties are purchased with the intention of being resold quickly at a big profit.

Buyers' fear that they will be locked out of the market if they don't purchase a property regardless of its price or their financial status.

"I think it's really a social phenomena of contagious excitement," said Robert J. Shiller, a Yale University economist who has written extensively on the subject. "Of course, people can't be excited forever, especially if prices stop going up."

Shiller and others have noted that the same excitement and euphoria now visible in real estate were present on Wall Street before it went bust.

"That's a sign of a bubble switching from the stock market to the real estate market," said Shiller, who spoke at the Century City conference.

Despite the levity injected into the conference -- bottles of bubble soap were passed out to participants -- there was no getting around the fact that bubble mania has frustrated analysts and especially those in the real estate industry, who insist that there is no bubble in such places as Southern California. They point out that it's part of a natural cycle for home prices to rise and fall.

Bruce Karatz, chairman of Los Angeles-based KB Home Corp., one of the nation's largest home builders, blames the bubble talk for depressing the stock price of companies such as his, which are doing great financially. He accuses the media of fanning concerns about the bubble.

"They feel that they were taken off guard," said Karatz, referring to the media's coverage of the dot-com crash and other financial disasters. "They don't want to be caught unaware again," he said.

Every month, DataQuick Information Services housing analyst John Karevoll crunches data on home sales, prices, mortgage rates, down payments, foreclosures and other real estate market indicators for Southern California. His conclusion: There's little evidence that the housing bubble exists.

He and others point out that home supplies are tight, mortgage rates are unusually low and the population keeps growing -- conditions that are driving sales and prices. "I'm surprised that people think there is so much risk in the market," he said.

But some observers aren't so confident. For many homeowners -- and those who want to be -- there is fear that behind any inexplicable rise in real estate prices is a big, fat bubble.

"I think there is one in parts of L.A.," said entertainment producer John Sylvain, noting that his friends' homes in Eagle Rock and elsewhere have doubled in value in recent years. "They made so much money in a short period of time."

Michael Kiper of Orange County also sees signs of a bubble. The medical equipment salesman wants to move his family out of a condo and into a three-bedroom home in the Newport Beach area. But prices have surged, and people are racing to outbid him.

"How can so many people be making so much money that they can afford" these expensive homes? he said. "It just can't keep going up."



Bubble towns?

Large increases in home prices in cities around the world have helped fuel talk and media coverage on the existence of real estate bubbles.

Los Angeles County

2001 median price: $224,000

2002 median price: $263,000

Percentage change: 17.4%

Orange County

2001 median price: $303,000

2002 median price: $354,000

Percentage change: 16.8%


2001 median price: $321,130*

2002 median price: $410,750*

Percentage change: 27.9%

Sydney, Australia

2001 median price: $187,250

2002 median price: $235,090

Percentage change: 25.5%

Note: 2002 figures for L.A. and Orange counties are estimates.

*January through September

Sources: DataQuick Information Services, Land Registry, Times research

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