Are we in a real estate bubble?

There are several reasons why I do not think a "bubble" exists. 1) Real estate transactions are labor intensive and take time, as well as the fact that a mass liquidation in homeownership is very unlikely. 2) There is a limited supply of existing homes on the market and new construction in this area has not been sufficient in numbers to raise any concerns. 3) Although, the average home price-to-income ratio, at nearly 3.5, is a record in the US, many other developed countires have ratio's at 4.0 or higher. In Monterey County, this ratio is closer to 10, which is very high, but comparatively speaking, this number is in line with other Bay Area Counties. 4) Returns on competing financial assets have been relatively low in comparison. 5) Inflation risks are still fairly benign. 6) Rising population rates, immigration and suburban sprawl add to the housing demand. 7) Mortgage delinquences hit a record low this past year.

While I do not think a real estate bubble is evident, there are certainly signs that the boom is over. Both consumer and home equity lending is contracting. Also, new home construction declined this past month. As Federal Reserve gradually increases interest rates, the cost of borrowing increases, increasing the risk of default, making lenders become much more conservative in their lending practices. In addition, we have seen a decrease in the average sales price in certain areas (i.e. Carmel, Big Sur). As interest rates increase, the cost of purchasing a home also increases, so long as incomes continue to rise, then the real estate market should be fine. If incomes remain flat or stagnate, then I would worry. Another important aspect to remember is that in a rising interest rate environment, if inflation is the leading factor in the increase in interest rates, then real estate should continue to be an excellent investment. Real Estate, like other commodities, tend to experience higher absolute returns in a inflationary environment.