Two years ago investors were worried about the impact of a bursting real estate bubble. At the time, I wrote that concerns about a real estate bubble were overstated. I indicated that any bubble was more likely to leak than to burst. Here are a few paragraphs from that article:

“For the most part, those who will be most hurt by a real estate slowdown are essentially the same groups that will suffer in any type of economic recession—those who are overextended, those who earn barely enough to survive, and those who through unforeseen circumstances are forced to sell at an inopportune time.

“Because real estate has done so well, quite a few folks have liquidated other assets to speculate on property. Many cannot withstand a decline in real estate values. They are the equivalent of those who during the technology bubble took the money from the home equity loan and invested all in technology stocks. 

“They are victims of poor judgment more than of any specific economic factors. People who have overbought big homes using gimmicks like no-interest loans they can barely afford are likely to run into trouble no matter what happens to housing markets.”

I received responses from a couple of readers who essentially indicated that I wasn’t smart enough to understand the depth of the problem or its full ramifications. Today I got a little support from Federal Reserve Chairman Ben Bernanke who said he does not believe a growing number of mortgage defaults will seriously harm the economy.

Bernanke said  that although there would be further increases in mortgage delinquencies and foreclosures through 2008, he does not believe this problem will be enough to derail the overall economy.

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” Bernanke told members of Congress.

Although there have been plenty of experts who have been warning about a real estate crash for more than two years, the real estate sector has actually remained among the markets’ leaders for much of that time. That finally appears to be changing, but there is still no evidence of a nationwide meltdown like was saw in technology stocks a few years ago.

The chart below shows State Street Global Advisors streetTRACKS Wilshire REIT (RWR) compared to the S&P 500 (gold line). The blue line is a 200-day simple moving average of RWR. Notice that over the past three years, RWR remained above its 200-day MA until just the past few sessions. For investors holding real estate positions, this might finally be the time to bail out.

But as Bernanke indicated, that doesn’t mean the bubble is about the burst. There are many regions where real estate prices are stable or still increasing. As a sector, real estate does not look appealing right now. But overall economic indicators remain strong and other market sectors are taking up the slack.
F.S.

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