Bursting the real estate bubble

Late last summer, Jaywant Pansare bought a $150,000 house south of campus in Canada Park. The Masters of Business Administration student and Otis Elevator Co. project manager mortgaged 90 percent of the payment.\nSince then, mortgage rates dropped while housing value rose nationally. On Sept. 5, Pansare had an appraiser evaluate the house to refinance his mortgage.\n"The bank called me the next day, and told me, 'Well, we got your appraisal. Your appraisal is the same as before,'" Pansare said.\nWith mortgage and interest rates historically low, home sales have been robust across the nation, causing a 20 percent annual appreciation in coastal cities and heightening concerns for a possible housing bubble. \nThe increased buying has fueled real-estate booms in some parts of the country, but generally not in Bloomington, said Travis Vencel of Vencel Appraisal Services. Because the town is heavily populated by students who are in the area for limited periods, few of them buy homes, even when interest rates are low.\nIn some cases parents buy homes or condominiums for their children, hoping to sell these properties in a few years to break even, but they are too small a segment to impact the overall market, Weger said.\nBloomington also lacks "large-scale" high-income earners, essential to drive high appreciation in cities like New York, San Diego and Washington, D.C., Weger said.\nAlso, Bloomington has no corporations slated to hire thousands of workers, said Larry Pickens, co-owner of Century 21 Realty Group, Sabbagh Pickens. With no large population increases on the horizon, demand remains stable along with rents and property value.\nBloomington's lack of interstate highways and myriad stop signs also discourage many large corporations from opening businesses here, Pickens said.\n"As a result, Bloomington's housing market is healthy and stable," Weger said. "It just doesn't have the kinds of characteristics that lend themselves to a bubble."\nFor Pansare the consistency means that if he sells his house he is not going to make a significant return on his investment. Still, he is happy with his decision to buy a place because he feels that over the long run buying is cheaper than renting. In addition, he has complete privacy and independence from any landlord he would have to answer to if he was renting.\n"In Bloomington, if you look over 15 to 20 years, you will see an average housing-price appreciation of 2 to 6 to 7 percent, with 2 percent on the low side, 6 to 7 percent on the high side," said Kerry Weger, a real estate lawyer and an adjunct finance professor.\nHousing prices are determined by their ability to produce rental income. In fact, the overall annual increase in home and apartment rents has constantly been 2 to 5 percent including this year, slightly above the inflation rate, said Vencel, who is also the board president of the Monroe County Apartment Association.\nTotal home sales in Bloomington between January and June were about $105 million, up 15 percent from $91 million for the same period last year, according to data provided by the Bloomington Board of Realters. Listings also increased from 755 to 817, and the median price of a home sold rose 9 percent from $105,000 to $114,363.\nThe increase, which mostly includes non-renting home owners, is a result of people buying more expensive houses because of lower interest rates, Vencel said.\nThe numbers indicate a strong market and not a bubble, Weger said.\nA housing bubble occurs when realty values spiral upward, as people speculate higher prices ahead and compete to buy up properties, said economics professor Bill Witte.\n"That's not related to the underlying supply and demand," Witte said. Eventually, people notice the prices have gone too high, and buyers gradually disappear. Sellers become stuck. They get foreclosures and have to sell their properties but cannot find buyers.\n"Then, the price collapses," Witte said.\nSuch speculative buying is foreign to the Bloomington market, as it's too risky, Vencel said. Fixing and remodeling older apartments in town produces little new income. Before the work is done, people may change their taste and preferences. That may nudge the properties out of fashion and pull down their value.\n"You don't speculatively buy apples -- which will go bad next week -- so you can sell them in January," Vencel said.