Is there a housing bubble? Economic experts from FED chairman Alan Greenspan to the National Association of Realtors to the Wall Street pundits all closely watch housing. The media, from local papers to the Wall Street Journal, are pounding on the question of whether or not a housing bubble is here, on the way or already past. So is there a housing bubble or not?

Well, that depends. If you believe everything that happens in San Francisco over the last two years will happen to your area, then you have plenty of reason to get hysterical. Or do you?

According to Dr. Mike Sklarz, chief valuation officer for FNIS' Analytics Division, hysteria is just what the media wants.

"They want to sell papers, and scary things sell papers," he scoffs. "A housing bubble is another opportunity to scare people and get them to buy papers."

Dr. Sklarz says hardly anyone in the media knows what they are talking about when it comes to housing, bubbles included. Why? "They don't have the data," he says. "Most of what they are saying is anecdotal - what they are hearing from others."

Even the median prices for homes which form the foundation for local, regional and national housing statistics and widely quoted by the NAR, Greenspan and others are suspect to Dr. Sklarz.

"Real estate data is way too broad to understand the prices. They (NAR) get the median prices for a big area (MSA) like L.A., or San Diego or New York. You'll get a number, all right, but what does that number mean? The whole Bay Area is a combined number - what does that tell us about the hundreds of markets in the Bay Area? We are talking about different-sized homes with a lot of different metrics, and there are different leads and lags within the individual neighborhoods. The Bay Area may be up 10 percent, but a high-end market like Hillsboro can be down 30 percent from a year ago."

At the heart of the housing controversy is the notion that housing is a similar investment instrument to stocks. "Homes do have an investment component," says Sklarz, "but they also provide a service component."

Another mistake made by many economic pundits in the media is that they will look at housing in a volatile area, like San Francisco, extrapolate housing data and then assume that the rest of the country is behaving the same way. According to Dr. Sklarz, housing typically follows a steady upward trend in alignment with rising salaries. A housing bubble is defined by a change or deviation, generally on about a seven-year curve. For example, it may take an area seven years to peak, then housing prices will drift down for three or four years, or go sideways, and then will rise higher by the seventh year.

Can a housing bubble be predicted? Sklarz says that there isn't enough historical data to go by, which is one of the reasons he and his team at FNIS' Analytics Division are devising new mathematical formulas to measure housing price behavior, and creating new software that will give "people the data - objective real data."

The result is Valueyourhome.com which supplies extensive information beyond what is available in a local MLS.

"Our effort to track individual markets around the country, starting with 350 cities, and with the tools like ValueYourHome, allows a user to draw historical charts, sales, price trends, price metrics like price per square foot, to understand the market better."

A comparable product, ValueSure, is an AVM product for the lender community. Both products are available as subscription services.

Included in the metrics, will be information that allows the individual broker, agent or lender the opportunity to predict at the individual home level whether that home will trend downward or upward in price.

Can you try this at home?

While not giving away all his formulas, Dr. Sklarz shares two important metrics that can help anyone tell if his or her neighborhood or home is in a bubble about to burst.

1. How fast have home prices risen?

   Using the stock market busts over the last few decades, Dr. Sklarz was able to come up with a metric that was proven by historical data that he found in Los Angeles, and that is if a market has risen rapidly (deviating from that steady upward trend) at the rate of 150 percent over a five-year period, that is a signal that a bubble could burst. A burst market doesn't necessarily mean that prices decline for years, but that there may be a decline and that prices will go sideways for a time before resuming an upward trend again.

2. What are new homes doing?

   If the stock of new homes is below historic norms, your area is not in a housing bubble even if prices are beginning to level off. In fact, Dr. Sklarz says that new home inventories nationwide are at four months on hand, the lowest in history. "Whether you are in a market that is tumbling seems related to construction. Builders aren't discretionary sellers like homeowners - they need to move inventory," says Sklarz. "Six to 10 months of inventory on hand is normal, but at 15 months, the market is soft and asking for trouble. Zero to five months on hand indicates a rising market."

This is good information for Realtors to know as they battle house-shy buyers and stubborn price-conscious sellers.

"These guys (Realtors) know this themselves," says Sklarz. "They know the individual neighborhoods on a house-by-house basis. I would encourage Realtors to relate this information to their clients and to track these things themselves so they can prepared."

"Real estate is a very inefficient business and functions in an information vacuum, and still does today," says Sklarz. "It's the biggest financial decision of a homebuyer's life and they are doing it in the dark. I've always been amazed at how naive the industry is, that a lender will loan money on as little as a credit score and an appraisal. Our commitment is to be informed whether you are homebuyer, lender, title company or a Realtor. All facets of the business need to have good data."

Published: August 28, 2002

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