To be sure, the real estate boom from 2001 to 2005 was the largest in U.S. history. Not since just after World War II has the real estate market appreciated so much, so fast. But no boom can go on indefinitely. Now the market psychology has changed in the midst of a so-called U.S. housing bubble, creating fear in the hearts of many homeowners and investors alike. The same people who were rushing to buy are now asking - how low can the market go?

So how did this happen? Are we really in a U.S. housing bubble?

First of all, it is implied that a bubble will at some point 'burst.? But in reality, real estate markets generally don't burst. Sure there have been exceptions like the markets in Boston and California in the early '90s, the market in Texas in the '80s as a result of oil prices, and the market in Arizona in the late '80s as a result of the S&L crisis. But for the most part, real estate markets don't burst they tend to dip a bit and then stay flat for extended periods in the U.S. Housing bubbles are actually quite rare.

If you take a closer look at our U.S housing bubble, you will see that the recent boom was largely centered in the coasts and southwestern U.S. (California, Arizona, Nevada, Florida, etc), while many of the markets in between were relatively quiet. Now, some of the markets that previously did not participate (Texas and parts of the Mid-West) are experiencing price appreciation, while many of the regions that previously experienced hyper-growth are now faced with lower prices. National median home prices decreased 2.7% in 2006 - and we call this a U.S. housing bubble?

While it is true that 2006 was the first year in the past 70 years that experienced a national decline in median home prices, there have been plenty of real estate boom-to-bust cycles in local markets in the U.S. Housing bubbles, accordingly, are more prevalent on a local level rather than on a national level.

On a national level, the important issues to monitor are interest rates and market psychology, which is largely driven by the media. These can certainly influence a U.S. housing bubble. But regardless of the national market, the real issue is what's going on in your local area. Evaluating economic and social trends in your area is essential to determining the direction of prices.

So how do you analyze your local market?

Let's not assume that this is easy. There is no definitive guide to determining the direction of prices in any given area. However, there are several statistics that can give you some insight into the market.

There are a few things that I look at to determine the stability of a local market. One thing I tend to look at in the residential market is rental yields. I define rental yields basically as annual rents divided by purchase price (or market value). I have seen some people adjust annual rents for vacancy and maintenance. But the calculation is fundamentally the same. It shows you how much income a property derives relative to its cost. Now, I don't look at this as a cash flow indicator. But I compare this to the area's historical rental yields to determine whether the yields are out of line. Rental yields will obviously be lower in more expensive markets, but sooner or later, if significant price appreciation is not followed by an increase in rents, a correction may be near.

I also pay close attention to job growth. Most market downturns are driven (at least in part) by a loss of jobs. Strong employment obviously helps demand, but you also have to consider the supply equation. Homebuilders put so many new homes on the market that even in strong job markets, such as Arizona, supply concerns will eventually come into play.

Another good indicator is the inventory of homes on the market. Look at the actual number of homes for sale in your local area. Then compare this to the recent volume of homes sold. If you spot an increase in the supply of homes as compared to sales activity in your local market, price declines could follow.

Now, back to the U.S. housing bubble theory. Of course, housing prices can only rise so fast. This price appreciation in turn tends to stimulate new housing supply, which at some point will undermine prices. Realize that markets can stay overvalued or undervalued for extended periods of time, but eventually they will adjust themselves. You can't see such rapid price appreciation in so many areas without seeing some pullback.

But don't worry ? even if you believe that we are in the midst of a so-called U.S housing bubble, the world is not coming to an end as some would have you believe. Market psychology is changing and with it will come an adjustment period. Possibly our perceptions about real estate have forever been altered - or possibly not. One thing is for sure ? the market is always right. History will determine whether or not this was a U.S. housing bubble.

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