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Are we in a bubble? Yes, no and maybe

by James McClister

An eventual downturn

In 1997, San Jose State University economist Fred Foldvary made a prediction about the real estate market.

He said: “The next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as global war.”

Foldvary was right.

He based his prediction on a real estate cycle model created by economist Henry George in 1876 (later refined by Glenn Mueller). George observed that real estate markets rise and fall in four phases: recovery, expansion, hypersupply, recession.

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Modern day real estate expert Teo Nicolais, an instructor in real estate investment strategies at Harvard Extension School, compared the works of George, Mueller and Foldvary, to make his own prediction: the next crash “won’t happen until after the next peak in 2024.”

And while Nicolais’ prediction might prove true on a national scale, Shari Olefson, attorney and director of The Carnegie Group think tank, believes certain metro markets are already showing clear signs of a bubble.

“Clearly we look at prices and other fundamentals when we’re trying to evaluate whether or not we’re in a bubble,” she told CNBC. “The thing is, in some markets we are seeing that.”

Olefson remarked that yearly national home price increases of 5 to 6 percent are modest, but not all markets are appreciating at that rate. Several are reporting gains in the double digits. According to realtor.com’s bubble index, in 2015 at least 10 metropolitan markets had higher scores than in 2005, when a bubble was imminent.

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But still, experts contend that despite bleak numbers, the market isn’t in a bubble. Things are just really expensive.

“The havoc during the last cycle was the result of building too many homes and of speculation fueled by loose credit,” realtor.com Chief Economist Jonathan Smoke told Bloomberg. “That’s the exact opposite of what we have today.”

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