House Poor

Greenspan is rather late to the party. Economists, pundits and journalists (including myself) have been saying for months that the real estate market is overheated. New York magazine ran a cover story last week warning about a real estate bubble, whose author, Henry Blodget, is none other than the former Merrill Lynch Internet-stock bull. Presumably he knows a bubble when he sees one. About the only people who aren't fretting about soaring real estate prices are the ever-upbeat realtors (and even they will say, off-the-record, that the market is crazy) and, of course, those investors making their deposits on unbuilt condos after one too many mojitos.

Can all these Cassandras actually be right? After all, markets usually factor in the conventional wisdom, and prices are set accordingly. If everyone believes that real estate prices are about to implode, they would have already imploded. Despite the current chorus of caution, buyers are still lining up to buy real estate. Just this morning, we learned that existing home sales jumped 4.5% in April to a record 7.18 million units, according to the National Association of Realtors — far stronger than the flat reading economists were expecting.

I'm not convinced that real estate is in a bubble, or that prices are necessarily headed for an imminent collapse. I'm not selling my apartment or my weekend house in upstate New York to try to capitalize on a market peak.

On the other hand, I wouldn't dream of putting more money into real estate right now, and I wouldn't want to be over-leveraged with big mortgages in order to cash in on rising home prices. I can't foresee the future, but I can say to a near certainty that real estate prices won't keep soaring at an annualized rate in excess of 20%, as they did last year in some areas. You can do the math and see how fast that puts housing prices in the stratosphere.

But all of this prompts an important question for first-time home buyers, people who aren't speculators or investors, and just want a decent place to live and some security for their families. I got a poignant letter from such a person recently bemoaning my warnings that real estate was a sellers' market and a risky investment at current prices, especially with a risk of rising long-term interest rates. What's someone to do who's stuck paying rent and watching his or her savings steadily fall behind rising home prices?

I know the feeling. I remember vividly trying to save the money for a down payment on a New York apartment during the early- and mid-1980s, another period of fast-rising real estate prices. The more I saved, the more I fell behind. Everyone else seemed to have self-satisfied anecdotes: how they got an "insider's" price when their building went co-op, or how a six-room apartment overlooking Central Park in the San Remo went for $40,000 in 1976, the year I moved to New York. But I didn't have $40,000, or even $10,000 back then, and I was never an insider. Finally, after 10 years of renting, I landed a book advance that, along with all my savings, became the down-payment on a modest apartment. I was convinced I was buying at the top.