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Will This Bubble Burst?, February 2003
By Francyne Shapiro-Faraone


This is the question on everyone's lips. It's the subject of many conversations, industry seminars, media coverage, and expert analysis. The question is not will this bubble burst, it is when? Real Estate has always been a cyclical market just like the financial market and the two are still very closely tied to each other. We continue to be in the midst of great uncertainty following the after shocks to our financial climate from the attacks of September 11 and our economic environment still remains to be unknown. There is so much speculation about "the bubble" which adds more caution to even the very prudent investor. The cloud is hovering above and it's apparent that if income and job growth do not catch up that the ramifications will be felt throughout.

Interest rates are still very low. This has allowed many first time home buyers into the market, which has had a direct effect on the rental market. The projected upside in rents is not realistic when your future renters are becoming buyers. Be very leery of buying based on projected "market rents" which are currently not in place. Also, be very cautious on trying to achieve a sale based on the same theory, you may end up marketing your property in a false market which inevitably costs you dollars in down time.

Los Angeles County, not to be confused with Santa Monica, is experiencing a shortage of rental housing. Construction of residential units is at the second highest period in the past 12 years. There is a big push for affordable housing. Builders are being granted high-density bonuses by cities for projects that include affordable housing units. Construction of mixed use projects including residential units over retail is still going strong and Santa Monica is continuing to be part of this trend.

There remains to be a lot of overpriced inventory still on the market with people feeling that this is the "time to sell" as the market is so high. 1031 exchanges are very difficult unless you are willing to go out of the area and into secondary markets. We're seeing some of the more savvy investors selling and going out of the area for exchanges. Some sellers are just opting to sell and simply pay the taxable gain as the return on the investment is still very high even after taxes and they don't want to gamble as to when the market will turn.

As always, one must look at your own personal life cycle in conjunction with the economic cycle, the climate indicators and our market history. Real Estate still remains a very strong commodity as they're simply not making any more of it and everyone still wants their own piece of the rock. The question however, is "just how stable is the rock?"