May 25, 2005 -- -- According to the National Association of Realtors, pre-owned homes sold at an annual rate of 7.18 million units in April, up 4.5 percent from March's pace of 6.87 million -- a record-setting month eclipsing the previous record set last June.
Is now still a good time to buy, or is the real estate bubble going to burst?
People see home values skyrocketing and believe real estate always goes up in value. This however, is not true. Historically, the real estate market has appreciated between 3 percent and 7 percent -- less than the return of the stock market.
Last year, median home prices rose 15 percent. However, in today's market, where in many cities' prices are at all-time highs, real estate may be ready to fall. Today, the median single-family home price is $203,800. Just five years ago, the median single-family home sold at $139,000. In 1995, the median sale price of a single-family home was $108,500 (Source: National Association of Realtors).
Are there additional signs the real estate market is on the bubble?
Another sign the real estate market is on edge is the fact roughly 40 percent to 50 percent of mortgages thus far in 2005 are ARMs (according to the Mortgage Bankers Association of America) -- up from 18 percent of application volume in early 2003.
Homeowners in certain regions of the country are really stretching to get into a home. For example, according to The Wall Street Journal, in California, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from just 2 percent in 2002. Furthermore, according to the same report, only 18 percent of households can afford to buy a median-price house using a conventional 30-year, fixed-rate mortgage.
If you are still in the market to buy, what factors should you consider?
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.