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Are You Irrationally Exuberant?

Contributed by mm | August 12, 2004 3:23 PM PST

Are many of your colleagues talking about their successful real estate investments these days? CNN Money's Sarah Max thinks it is a sign for another bubble in the making.

I bought my house last a year ago for $315,000, and an identical house in our community was sold in the north of $355,000 just last month. My wife happily called me paranoid because I always told her that we should prepare for a price drop. Yes, I am actually believing we will see the burst of the housing bubble sooner or later, at least in some areas. Just take a look at the most recent house price report from National Association of Realtors, 49 metros out of 128 delivered double-digit price increase in the last twelve months. In fact, many areas are reporting double-digit quarterly sequential growth back-to-back for a couple of years (see detailed statistics).

It does not bother me much though. First, the Seattle area house price appreciation is relatively mild at 7.1% for the past 12 months and even less that for the earlier years. Seattle is also hilly so there is not much open space for new houses, and as long as Microsoft continues to create a couple of thousand new high-paying positions, there will be at least some new demand for housing.

Second, with 20% downpayment and a recent refinancing to 5/1 ARM that reduces my monthly housing expenses to under $1,500 (including mortgage interest, property tax, insurance and utilities), I am well living below my means. I can always keep the roof above my head no matter how bad the economy or the housing market turns out to be.

Third, a correction is not necessarily a bad thing: my equity in my home will be axed partially, but a broad-market decline will also make our next dream house, currently in the range of $500k-$600k, more accessible. (The common wisdom is price of more expensive houses will fall faster -- people will always need a place to live, but not necessarily a luxurious one.)

Source: The Kirk Report

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