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Harvard study: No housing bubble
June 26,2006

A new study by Harvard’s Joint Center for Housing Studies indicates that home prices will keep climbing and that the housing sector will have a soft landing as long as the economy continues to create jobs and builders reduce production to meet demand.

As home prices last year increased at their fastest rate since 1978, according to the “2006 State of the Nation’s Housing” report, some people expressed fear of a housing bubble, a situation where there is unsustainable growth in home prices. They feared the market would “pop,” causing home prices to fall, which would result in a loss of valuable equity for homeowners.

However, this situation is not likely to happen, according to the study.

“But, when and if house prices do fall, the so-called bubble is more likely to deflate slowly rather than burst suddenly,” the study said. “History suggests that appreciation eases for a year or two before prices come down in nominal terms. While dips of a few percentage points are common, nominal house prices rarely drop by 10 percent or more.”

In fact, major house declines usually only occur in markets where there is substantial job loss, overbuilding or population outflows, the report said. And fortunately, “these preconditions are nowhere in evidence across the nation’s metropolitan areas,” said a statement by Harvard’s Joint Center for Housing Studies.

In fact, the Harvard study said that even with the rising interest rates and higher costs, price appreciation continues to draw buyers to the market.

“…the housing sector continues to benefit from solid job and household growth, recovering rental markets and strong price appreciation,” the Harvard report said. “As long as these positive forces remain in place, the current slowdown should be moderate.”

The study also predicted that housing production and investment will reach new highs over the long term.

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