Home prices have been rising with great ferocity in recent years, a matter which suggests to some that a real estate bubble is surely ahead. Now from the Federal Reserve Bank of New York -- that citadel of capitalism -- we hear something which approaches common sense: Home prices may not rise everywhere and everyday, but real estate has done wonderfully well in recent years and relative to other investment options offers a surprising level of security and potential.

That's the message I got after reading Are Home Prices the Next "Bubble"? by Jonathan McCarthy, a senior economist, and Richard W. Peach, a vice president, at the Federal Reserve Bank of New York.

"Home prices," say the authors, "have been rising rapidly. Since 1995, real home prices have increased about 36 percent, roughly double the increase of previous home price booms in the late 1970s and late 1980s. Moreover, home prices continued to rise strongly during the 2001 recession, the sluggish recovery through mid-2003, and the recent period of more rapid growth."

The result of such increases is that real estate represents substantially more wealth than stocks and bonds.

In the third quarter of 2003, "households held about $14.6 trillion in real estate," they say. Today, of course, as a matter of generally rising values the total is no doubt larger.

"By comparison, households held about $12.8 trillion of corporate equities and mutual funds" in the first quarter of 2000 -- what the authors describe as "the peak of the stock market."

"Our main conclusion," say McCarthy and Peach, "is that the most widely cited evidence of a bubble is not persuasive because it fails to account for developments in the housing market over the past decade. In particular, significant declines in nominal mortgage interest rates and demographic forces have supported housing demand, home construction, and home values during this period. Taking these factors into account, we argue that market fundamentals are sufficiently strong to explain the recent path of home prices and support our view that a bubble does not exist."

The latest news on the home front surely supports the authors.

According to the National Association of Realtors, existing-home sales chugged along at a seasonally adjusted annual rate of 6.80 million units in May, the latest available figure and a record.

"The national median existing-home price was $183,600 in May," says NAR, "up 10.3 percent from May 2003 when the median price was $166,400. The median is a typical market price where half of the homes sold for more and half sold for less."

New-home builders are also have a joyous season. The National Association of Home Builders says that in May "single-family housing starts rose 1.4 percent in the month to an historically healthy seasonally adjusted annual rate of 1.64 million units."

Peach and McCarthy deal with the question of why home prices rise. Yes, some of the increase is simply a result of inflation. However, the authors also say that "a significant portion" of price increases relate to quality; that is, the desire of people to live in better houses, homes with more features and bigger houses.

If there was a substantial housing decline, the authors say consumer spending would drop by about $150 billion a year. That's not a lot in the context of an $11 trillion economy.

Why so little impact if real estate values decline? Most homes are not for sale at any given time and most owners have now locked-in fixed-rate loans at recent low rates.

That said, it remains prudent to consider that real estate is a commodity best held over the long term, that prices have fallen in local communities even as national trends have edged higher and that despite generally good economic news we still have an enormous budget shortfall, a huge balance-of-payments problem, worries about job quality and unemployment, jobs flowing overseas and a dependency on foreign oil which is unhealthy in terms of both dollars and politics. And we're at war.

For more articles by Peter G. Miller, please press here.

Published: June 29, 2004

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .