Chicago, Feb. 14 (Bloomberg) -- Despite what U.S. Federal Reserve Chairman Alan Greenspan and the real estate industry say, there's evidence that housing bubbles are still inflating across the country, especially in Boston, New York, Miami and Southern California.
Michael Youngblood, research director for GMAC-RFC Securities in Bethesda, Maryland, a wholly owned subsidiary of GMAC Financial Services and the largest short-term lender for mortgage bankers in the U.S., said in a soon-to-be-released study that ``the number of cities with bubble-prone markets doubled in 2002 and represent nearly 40 million people.''
Of the 55 markets Youngblood identified as bubble prone, he says his research shows 20 metropolitan areas are most likely to see market corrections, although he doesn't know when.
That means if you are considering buying in those markets, you may want to hold off. And if you have a reason to sell, now may be a good time.
Residential real estate has received billions in investor dollars because of the three-year slump in stocks, the threat of war in Iraq and other factors. More than half of 1,800 people polled by E*Trade Financial, the online service, said they ``find real estate investments more attractive than stocks.''
Yet real estate risk is a matter of the stability of your income and how you finance your properties. If you are highly leveraged -- meaning you have low-equity positions in your properties -- you are most at risk during property market corrections.
There are a number of steps you can take to protect yourself from bubbles. First, you need to determine if your market is at risk.
Most Dangerous Markets
A bubble is defined as a market that is moved by almost sheer speculation that ignores underlying fundamentals. In the case of real estate, Youngblood identified markets where double-digit housing price increases are well exceeding per capita personal income growth.
It's logical to see home-price increases where jobs are being created, the local economy is booming or there's a short supply of homes. Those fundamentals generally don't support the price increases in the markets Youngblood is studying.
For example, Youngblood cited Monmouth and Ocean Counties, New Jersey, where he said home prices rose an average 13.1 percent in the third quarter of last year. He suspects that those increases aren't sustainable since income growth in those areas only rose 1.9 percent in that period.
Youngblood is most concerned about the following markets:
-- In the Northeast, Boston; Monmouth-Ocean Counties, N.J.; New York City; Nassau-Suffolk counties, New York.
-- In the South, Fort Lauderdale and Miami.
-- In the West, Bremerton, Washington; in California, Oakland, Orange County, Riverside, Sacramento, Salinas, San Diego, Santa Barbara, San Luis Obispo, Santa Rosa, Stockton-Lodi and Vallejo.
All told, Youngblood found that for the year ending Sept. 30, 2002, home prices rose an average 6.3 percent in 175 metropolitan areas, compared with a 2.3 percent increase in personal income.
``Why are we seeing such gains in these markets?'' Youngblood asked. ``They're not supported by the fundamentals, which is the classic definition of a bubble. Gains in those markets are likely to be reversed. It will be painful.''
The Fundamentals
Double-digit gains in local markets by themselves don't mean there's a bubble ready to pop. It may not be like the Nasdaq in March of 2000.
Greenspan, for example, disputed this comparison in Congressional testimony last April, noting ``the turnover of home ownership is less than 10 percent annually -- scarcely tinder for speculative conflagration.''
The Office of Federal Housing Enterprise Oversight, or OFHEO, the watchdog agency over government mortgage enterprises Freddie Mac and Fannie Mae, is contradictory on the subject of bubbles.
OFHEO stated in a Feb. 4 report it had found ``no evidence of speculative house price bubbles on a regional or national basis,'' while also acknowledging ``there is evidence that house price appreciation in some local markets has recently exceeded the rates that can be explained by economic fundamentals.''
There is definite cause for concern if the economy heads into a double-dip recession, is bogged down by war concerns or unemployment rises in the hottest markets.
The key to real estate pricing is always local economic and housing conditions, so that should be your first point of reference.
Watching Your Local Market
All real estate is priced based on supply and demand, financing rates and the local economy.
Lawrence Yun, senior economist for the National Association of Realtors, a real estate trade association, said most of the highest-price-growth markets in Southern California, New York area and Southeast Florida are experiencing housing demands that exceed local supplies.
``The data is not surprising,'' Yun said. ``There are not enough homes being constructed in these markets to accommodate housing population growth. There may be a few markets where prices are a concern, but I can't pinpoint them.''
Local job growth is also a key local indicator for housing. Mark Stadtlander, a certified financial planner and President of the Foster Group, a money management firm in West Des Moines, Iowa, for example, said his area is fairly resilient due to local expansion in the insurance industry, which has increasingly relocated to Iowa from Hartford, Connecticut.
``We're the new insurance capital,'' Stadtlander said. ``Even though there's been some downsizing, it hasn't had a big effect.''
What You Can Do
For most homeowners who aren't planning to relocate, the best strategy is to stay put. There are a few caveats, though:
-- For those considering moving or a lifestyle change, eye selling your primary residence if it means reducing your overall housing costs. Stadtlander says smaller properties -- especially for empty nesters -- may have more appeal ``to allow you to downsize while mortgage rates are low.''
If your market is overheating, go slow on big improvements to your existing homes. You may be pricing yourself out of the market if your additions create a $500,000 home in a neighborhood of $400,000 homes.
-- Consider delaying purchases of additional properties in overpriced markets.
-- Increase your equity stake in properties you want to keep. That may mean increasing payments on principal and converting an adjustable-rate mortgage to a fixed one to hedge against a rise in interest rates. If you're planning to refinance, don't take equity out if you are in a hot market.
In times of economic turmoil, real estate is still a reasonable safe haven in most places. There may be no place like home, although you still need to keep an eye on your local market.