Interest in real estate in the United States is at an all time, or so it seems. In many markets, the rate of purchase and sales, inventory turnover and new housing starts has steadily climbed, so much so that finance media and some economists are concerned about a housing bubble.

In a very recent retirement planning presentation in the US that I attended, the American Institute of Certified Public Accountants presented a full blown discussion on the rapid growth in the US housing market by inviting a real expert, Dr. David A Lereah, SVP and Chief Economist for the National Association of Home Builders, as well as the spokesman on economic forecasts, interest rates, home sales and mortgage rates. Having worked extensively in this field for more than 20 years, he also studies and routinely monitors trends and issues confronting the real estate market.

His perspective is quite different from that of Alan Greenspan and others, and as a result he is sought after in media broadcasts such as CNN, CNBC, C-Span as well as being regularly quoted in financial publications such as the Wall Street Journal and the New York Times.

Real estate trends, both positive and negative, have an effect on consumer confidence and spending, thus the housing industry as a whole is watched very closely. When consumers feel wealthy because of excess equity in their homes, they are more inclined to make discretionary purchases and they feel more comfortable about the future.

There is no doubt that the housing market is hot, and Dr. Lereah makes a compelling case by just quoting the numbers. In Las Vegas alone (where the conference was held), real estate price appreciation is up 52 percent in the 2004 year, making this the third year of double digit increases. Las Vegas is not alone; 66 other large metropolitan areas have also seen significant increases. Whether these escalating prices are driven by less confidence in capital markets or other criteria is still speculation. Dr. Lereah feels that real estate values are driven by baby boomers? lifestyle changes and demand for diversification just as they have influenced every large demographic innovation in the last 20 years.

With this recent real estate boom starting around five years ago, many baby boomers are now focusing on purchasing second homes, or helping their boomer children with their starter homes. Statistics bear this out. In 2004, 36 percent of all home sales were second home purchases and of those, 23 percent were for investment, and 13 percent were specifically for vacations away from home sweet home.

Additionally, new citizens who migrated to the US in the last 15-20 years are also tapping into the real estate markets, finally accumulating the resources to own a home. The highest number ever, of Hispanic, African-Americans, and other nationalities, first and second generation, now own their own property.

Las Vegas?s boom has also benefited from two economic drivers. The cost of real estate in California is out of reach for the average family, who are now selling homes for median prices of $650,000 to buy a comparable home in Nevada for $280,000. In many cases, they have built up enough equity to pay cash for the new house. This negates the perception of consumer debt at an all time, at least for these relocating Californians.

Secondly, Las Vegas is becoming the biggest distribution centre hub in the Western states, thus adding sheer economic power to what had always been perceived as just a gambling town. New diversified businesses mean new jobs.

Current estimates indicate that 5,000 people a week are moving in to take advantage of thriving economy. Massive frenetic building is everywhere while available supply of real estate is very low.

Could there be a US real estate bubble? Our expert indicated that there may be, but probably smaller ones in some areas, but feels that on an overall national basis that this is still very much a debatable topic.

Dr. Lereah emphasised that to have a real estate bubble, there has to be a perfect alignment of the following indicators:

Prolonged Price appreciation in double digits, say more than three years in a row;

Available houses for sale rises above a five month inventory, typically very abruptly, this is an indicator that homes are not selling very quickly and may even be on the market longer than nine months;

There is a heavy concentration of investors purchasing homes instead of live-in home buyers. Prices tend to go down when a concentration of real estate investors decide to liquidate;

There is a serious negative event, such as abrupt significant job losses, i.e in 1991, Boston experienced redundancies of approximately 15 percent due to changes and restructuring in technology firms; and

High numbers of adjustable rate mortgages or interest only mortgages

So, reviewing all of those criteria, it is possible for all of the above to happen, but not abruptly nor all at once, which may then mean that many homebuyers who were not be able to reach into a highly appreciated market may actually be able to realise the opportunity of a life time with the home of their dreams in a merely slower real estate market.

As with any article discussing specific investments, results may be more or less than expected, and results may not happen as discussed. A decision to invest in real estate cannot be made in isolation without considering your overall financial picture today and in the future. Careful thoughtful planning that considers all alternatives is the best way to invest in any market instrument.

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