The Real Estate Bubble By Gary Woods Beautiful Santa Barbara Real Estate The history of Real Estate is littered with booms and busts. Since we are currently riding high, the obvious question becomes, "so when is the next bust." Not being prescient I don't know, but I can look back and tell you what has brought us to where we are. In the 70s the Nixon administration took the country off the gold standard. This allowed the currency to float free of the restraint of being tied to gold. Because the dollar was allowed to float inflation started to kick in. To curb this Wage and Price freezes were instituted. The wage and price freezes worked while they were in place, but as soon as they were taken off you'll never guess what happened. Okay, you guessed it, wages and prices started to increase. The inflation rate reached the dizzying heights of 4% by the time Jerry Ford became president. Jerry seeing big problems down the road decided to try to curb inflation with the WIN Buttons (Whip Inflation Now). Oddly enough this didn't work terribly well. All during this time, 3% was traditionally how much housing increased annually, so offering 3% on passbook savings was basically a wash. Unfortunately as prices started to rise banks no longer thought their regulated interest rate of 3% was all that cool. By the time Jimmy Carter got into office interest rates were starting to cook along pretty well, but the banks wanted desperately to get deeper into making loans on homes had no real way to attract funds with their puny passbook savings accounts. To free up the banks, the regulations on banking became relaxed and banks started making loans to places like South American dictatorships. The prime interest rate reached about 20% at this time and there seemed to be no end in sight. By the time Ronald Reagan came to office interest rates started to recede but the Gipper thought it would be good if we built the nation's depleted defenses up to give the Soviet Union something to think about. To build up our defenses the defense budget went up substantially. The country was literally awash with money. Combine this fact with the property tax rebellion of the 80s and you got a whole lot of increase in the housing market. Prices started to rise dramatically and it doesn't take too many years of 30% annual increase in prices to get to a place where the bottom of the market is insane and it goes up from there. By the time George Bush I came into office those lending institutions that had made loans to South American dictators started to see their loans stop performing. Combine this with the effect of the Defense buildup subsiding and you've got trouble my friend. Lenders were desperate for cash and started calling some of their questionable loans and the downward spiral was on. The more repossessions that hit the market the deeper the spiral became. In Real Estate we all learned the meaning of "Upside Down" which is when you owe more on a property than it is worth. By the time that George Bush left office, lending institutions had stabilized and the country was on a good financial footing. About that time, with the coming of Bill Clinton the tech revolution really took off. All of a sudden money started pouring into the Stock Market. The Dow reached 10,000 plus and there was nowhere to go but.. As the market started to tank not everybody watched his or her holdings fall to nothing. A lot of people cashed out and had tons of money sitting there getting a staggering 3% (if they're lucky) on their money. So what happened at that point was people started moving that money out of savings and buying Real Estate. Consequently prices started to rise as more money poured in. Across the board prices increased, from the top of the market to the bottom everything went up. So, that leaves us where we started. Is there a Real Estate bubble? Currently I don't think so. In the top end, the rate of increase has slowed dramatically to about 2% annually. But in the low to mid areas we're still seeing increases in prices. We get several inquiries daily from people interested in purchasing real estate. There are more homes on the market now than there have been in the previous few years, but the inventory is still low. The combination of low inventory, high demand and very low interest rates still mean there will probably be upward pressure on home prices. The market is starting to turn to more of a buyer's market, but it's still not there yet. I hope prices will start to stabilize soon, but I'm not holding my breathe. Gary Woods Beautiful Santa Barbara Real Estate (805) 967-7823 (805) 967-5554 http://www.santabarbaraproperties.com garyandlaury@santabarbaraproperties.com

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