Monday, December 06, 2004

The housing boom. Is a bust in sight?

Monday, December 6, 2004

spacer Cover story

A couple sold their house in less than a week for more than the $649,000 asking price.

Two offers came in at the higher price - with no contingencies, not even loan approval.

The deal clincher was a letter written by the winning bidders about why they wanted the house. They enclosed a picture of themselves and their two dogs, Bacon and Eggs.

The real estate market has sizzled in Richmond and elsewhere for the past seven or eight years, keeping the economy propped up even during a downturn.

Some places are hotter than others. Bacon and Eggs live in Seattle with their owners.

Richmond is no Seattle. Resumes are not required to buy a house here.

Housing experts say that's a good thing. It means Richmond, despite escalating house prices and a brisk market, is less likely to see a housing bubble.

"My sense in Richmond is there is no bust in sight," said David H. Downs, a real estate professor at Virginia Commonwealth University. "Richmond has had a great little run-up in prices, but it's not at all as stratospheric as we have seen in other parts of the country."

Real estate boom markets typically last eight years - "plus or minus a decade!" Downs said.

This much we know: The U.S. housing market has set sales and pricing records this year. It has been fueled by historically low mortgage interest rates and new ways of financing, such as interest-only loans.

"It's still going up; it's still good," said Cotton Billingsley, a sales agent for Metropolitan Real Estate Inc. in Richmond.

"I really don't know when it will turn. If I had to bet, I would have bet it would have cooled by now."

An agent for 30 years, Billingsley remembers when carpenters, bricklayers and plumbers roamed subdivisions looking for work in the 1970s.

He recalls the early 1990s in Richmond, when builders slashed prices by $20,000 and sellers offered to pay part of the mortgage for the first year.

Since then, housing has shot up, but not everywhere. In areas where prices fell, local economies weakened.

Economists and housing experts have debated for years whether the rapid rise in prices has created a pricing bubble, similar to the boom-and-bust cycle in the'80s and early'90s, or if it is simply the result of supply and demand.

"While some elements of a housing bubble clearly exist, others do not," said Mark Vitner, a senior economist with Wachovia Corp.

Housing prices are rising faster than income, but that is only one factor that could lead to a bubble, he said. In most cases, demand outstrips supply, pushing prices up. Demand does not create bubbles - speculative investments do.

The sharpest price increases are in areas with the strongest population growth, Vitner said. "That is particularly true in Northern Virginia."

Northern Virginia has imposed stringent land-use programs, exacerbating a shortage of supply. "In D.C., they are adding more people and more jobs but building fewer homes," he said.

Vitner said he sees bubble possibilities in some markets but not nationwide. He is cautious about Miami, where investors buy condominiums before they are built.

John P. Calverley, chief economist of American Express Bank and author of "Bubbles - And How to Survive Them," said the country seems to be in the early to middle stages of a housing bubble.

"The most bubbly areas are Massachusetts, New York, New Jersey, Florida and California."

Bubble characteristics include rapidly rising prices, high expectations for continuing sharp rises, a jump in lending and an increase in indebtedness, Calverley said.

According to a recent report from the Federal Reserve, residential real estate activity may be retreating and home prices leveling off.

"We can't continue to see double-digit price increases for sustainable periods," said Walter Molony, spokesman for the National Association of Realtors. "That's a yellow flag. For the nation as a whole, we are in good shape."

The Richmond area is healthy and affordable, "with room to grow," Molony said. It is unlike high-cost markets such as Boston and San Francisco, where the price appreciation is rapid and where first-time buyers are virtually priced out.

Nationally, the median price of an existing-home - with half selling for more and half for less - was $188,500 in the third quarter, up 7.7 percent from the same period a year ago, according to the National Association of Realtors.

In the Richmond/Petersburg area, the median price rose 9.5 percent to $174,600. In Northern Virginia, the median is $394,950.

"Home prices are still rising faster than his- toric norms because we continue to have more buyers than sellers," said David Lereah, chief economist with the National Association of Realtors. "However, those conditions vary widely, with the greatest pressure on home prices in California and Florida."

In Seattle, where Bacon and Eggs live, the median price of an existing home is $303,900, high by Richmond's standards but low by San Francisco's. (San Francisco's median is $646,300, the highest in the country.)

"You could find a small house in poor condition in a really bad area in the $300,000 range," said Deb Finder, who moved to Richmond a year ago from San Francisco. "Or, you could find a tear-down house outside the city for $600,000."

She declined to say how much she and her husband, Steven Finder, paid for their house in western Henrico County, but she said it would sell for "millions and millions of dollars" in San Francisco.

"We rented in San Francisco and saved money so we could buy somewhere else," she said. They moved here for his job with Wachovia Securities.

Compared with San Francisco's, house prices in Las Vegas seem like a bargain. But that city saw its median price surge 53.7 percent this year, to $283,200.

"There's got to be some froth in that," said Ned Massie, past president of the Richmond Association of Realtors.

Massie said he sees no bubbles in central Virginia, where rising prices are driven by low supply.

Central Virginia, like Northern Virginia, is creating an artificial shortage of housing by localities' efforts to restrain growth and impose proffers on builders, he said.

"The only way I see a bubble would be a tremendous spike in interest rates. As long as the rates go up in a measured way, as they are supposed to, I don't see it happening."

The rate for a fixed 30-year conventional mortgage is about 5.5 percent, low by historical standards. Subject to change quickly, it shot up in one week last year a full percentage point to over 6 percent before settling back down.

Joan Peaslee, an agent with Prudential James River Slater in Richmond, said that three years ago, the market was going "up, up and up." She said she regretted saying it, because she knows how quickly the market can change.

It turned out she was right. But she remembers the late 1980s: "One day, one spring, the spring market never came."

Cabell Childress, an agent with Long & Foster, is optimistic. The Richmond market will stay strong, he said. "There's nothing to fret about as long as interest rates stay under 9 percent."


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