Affairs: Bubble Trouble

Has the bubble burst? A new report written by Kevin Gillen, a Wharton researcher who studies the Philadelphia real estate market, says Center City house values — which increased by about two-thirds between 2001 and 2005 — fell 6.4 percent in the first quarter of 2005. Those bullish on local real estate say it might be just a blip. After all, Philly homes are still undervalued compared to other cities, at least using price/rent ratio as a measure. Philly’s average P/R ratio is now 10 — a house here that could fetch $24,000 in yearly rent costs an average of $240,000—while Washington, D.C.’s P/R ratio is 17, and San Diego’s is 25. (That same house would go for $600,000 there.) Even the national P/R average is 12.

But that’s the thing about bubbles: The last to inflate are often—unjustly, ­unluckily—the first to deflate. What’s more, Philly real estate has historically cost less than other cities’, all of which suggests the downturn in prices in Center City might not be just a blip. The silver lining? If the bubble is bursting, we’re likely to feel less pain than those cities with higher valuations. As Gillen told Hallwatch.org, “The market may bloody our nose and lip, but in other markets, they will get tossed off the roof” when the correction comes. The only exception here is Center City luxury condo owners: They’re paying an average P/R ratio of 18 — far above the city’s historical average — and a price per square foot that’s as much as twice that of grade-A office space.