You gotta love the folks on Wall Street. When prices are dropping it's an example of "profit taking." But when home values are rising that's the time to be cautious and worry about a real estate bust.

Fortune magazine now says it "looks like" the real estate bubble is about to burst.

"Two years ago FORTUNE looked at the housing market and saw reasons to be concerned (see Is Real Estate Next?). While home prices nationally were only 5% to 10% overvalued, we said, some frothy markets, mainly on the coasts, were more than 20% above historical norms. Our conclusion: While the trends were worrisome, 'for the nation as a whole, no housing bubble exists ... we're not there yet.'"

Now says the magazine, things have changed.

"Two years later it looks like 'there' is finally here. The housing market is rapidly losing touch with reality. Fueled by interest rates that have remained near record lows, prices have continued to soar, and the gap between home values and the underlying fundamentals such as personal income and job growth is greater than ever. The most alarming development, though, is the change in psychology." (See: Is The Housing Boom Over?, September 20, 2004)

Does this mean savvy folks should move their money from, say, homes, to the stocks, bonds and mutual funds available from securities brokers? No need to worry about soaring prices on Wall Street this year: The Dow Jones Industrial Average closed at 10,409.80 on January 2nd and at 10,313.07 on September 10th.

Must have been those profit-takers at work....

But while stock prices are the same nationwide -- the price of a share of IBM is the same in both Toledo and Tampa -- the story is different with real estate. Markets vary, and while most may echo national trends that does not mean home prices in a given community or on a particular street will necessarily follow along.

To have a market which is "over-valued" you have to have a bunch of people who won't buy. In my community, for example, most houses have been selling in a week or so. But one house was recently placed on the market at a price which seemed about $150,000 too high. The market agreed: Months later, even with a substantial price reduction, the home is still for sale.

Stock brokers routinely tell investors that past performance does not guarantee future results, a nice way of saying that there are no historical norms for securities. What happened in '98 does not necessarily mean that the same thing will happen in '05.

Why then should there be "historical norms" for real estate? Real estate is traditionally seen as a -- forgive me, big word coming up -- "nonhomogeneic" commodity. In plain language, that means all properties and transactions are unique -- they're all one-of-a-kind. What happened 15 years ago may not be repeated next year. Or ever.

One can properly observe that home prices have been rising faster than incomes, inflation and perhaps anchovies. Does that mean real estate is somehow "overpriced?"

You might ask: When a stock is issued and goes up 20 percent on the first day, does anyone say, "ah, well, you know incomes did not rise 20 percent on Monday, thus people should sell immediately."

Or do they say, "gee, wish I bought more."

I have no idea where future real estate values are headed. Unemployment levels, the balance of payments, personal debt, interest levels, the federal debt and the damage done by high oil prices could all impact home demand -- and not in a way that would thrill owners.

But watch population trends and personal preferences and here's what we can see: We keep adding people. Most people like to live indoors. Folks like to live in a relatively few selected areas. These ingredients power real estate demand and in most locations new construction has not increased supply to the point where prices are being driven down.

Fly from New York to Los Angeles and you can see vast stretches of land which are virtually empty. Houses for $100,000 or less abound. But such locations lack the lifestyles, job opportunities and social interaction most people want. Instead we huddle on our coasts and in great metro cores because that's where we want to live.

In effect rising housing prices are a by-product of local supply, nearby demand, personal preferences and a desire to be where the action is.

Could things change?

Sure. But for most of us -- those not selling or refinancing anytime soon -- the issue is largely moot. By not being in the market we effectively tamp down supply, and that's one reason home values continue to rise.

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

Published: September 14, 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 .