Sunday, January 16, 2005

KC appears sheltered from housing 'bubble'

By Rob Roberts
Yale University economist Robert Shiller, who accurately warned of the late-1990s stock market bubble, is among the experts now warning of a national housing bubble.

But local housing and economic experts advise not to worry about a housing bubble bursting and erasing significant household wealth here. Appreciation of Kansas City home prices has been based on strong market fundamentals and will continue, they said.

"You hear threats of bubbles," said Bruce Rieke, a Lenexa contractor and president of the Home Builders Association of Greater Kansas City. "But if you look at the overall demand and how much housing will be needed in the future, it's pretty astounding."

Tim Underwood, executive vice president of the local HBA, said a recent study by the Brookings Institute projected that demand in the Kansas City area between now and 2030 will require the construction of 420,000 housing units.

"That's 40 percent of everything we have on the ground now," he said.

In the shorter term, Underwood said, "we think we'll continue to see appreciation rates similar to what we've seen over the last five years."

Figures from the Office of Federal Housing Enterprise Oversight show that the average home price in the metropolitan area rose 6.59 percent between the third quarter of 2003 and the third quarter of 2004. That raised the area's appreciation rate for the five-year period that ended Sept. 30 to 31.6 percent -- or enough to raise the price of a $200,000 home built in 1999 to $263,200.

The appreciation rates for Kansas City fall well below the national rates. Meanwhile, housing prices in other metropolitan areas have shot through the roof, heightening concerns of bubbles in those areas.

Nationwide, "the growth in house prices over the past year surpasses any increase in 25 years," said Armando Falcon Jr., director of the OFHEO.

By contrast, OFHEO Chief Economist Patrick Lawler said, the average price of nonhousing goods and services, as measured by the Consumer Price Index, grew by 2.68 percent during the 12 months that ended in September.

Rieke said that one factor driving up home prices in the Kansas City area is the rising cost of materials.

"We saw a 35 percent increase in lumber last year," he said. "Steel doubled. Drywall went up. Carpet went up. Concrete went up."

Although lumber prices since have declined, Rieke said, the average cost of materials and of new homes will go up again this year, and that will drive up prices in the resale market.

Underwood said that increasing demand also will keep local home prices on the rise.

"It looks like we're going to have a record year in 2004 as far as single-family permits," Underwood said of the area's forthcoming permit totals. "For the first time, we're going to go over 11,000."

In Johnson County, one of the metropolitan area's hottest housing submarkets, the population has been growing by an average of 11,000 residents a year during the past several years.

But even there, Johnson County Appraiser Paul Welcome said, housing appreciation has been moderate. Between 1999 and 2004, the average appraised value of single-family homes and condominiums in Johnson County increased by 36 percent, from $154,700 to $210,400.

Welcome, who will release new residential property valuations next month, predicted that this year's rise will be 4 percent to 6 percent.

Metrowide, Reece & Nichols Realtors predicted that new homes will appreciate by 5 percent or more this year and that home buyers will gravitate toward adjustable-rate mortgages to offset steeper prices.

"In certain areas, new home prices are becoming unaffordable for even middle-income working families," said Underwood, whose association has been lobbying cities to allow smaller, cheaper homes and higher residential densities.

For those who have managed to attain the American dream, home appreciation has been a boon, said Randell Moore, a Kansas Citian who edits the monthly Blue Chip Economic Indicators newsletter.

"It's the reason that Americans' wealth has rebounded so fast in the last several years, even though stocks didn't do very well during that period," Moore said. "And a lot more Americans own homes than own stocks."

Housing bubbles -- inflated by investor enthusiasm rather than market fundamentals -- may be developing in some of the country's hottest markets, Moore said.

"But any prediction that prices will fall nationally seems pretty far-fetched," he said. "They, of course, did in the '30s, during the Great Depression. They have not, however, fallen nationally since then in any year."

To be on the safe side, however, homeowners should not count on endlessly rising house prices as a long-term savings vehicle, said Chris Doyle, a spokesman for American Century Investments.

"Home equity has sort of replaced the traditional savings account," Doyle said. "But that is probably not a great strategy."

Neither are reverse mortgages, which allow homeowners to tap into their equity during a period of time, said Doug Lockwood, American Century vice president of investor guidance.

"If that equity ever diminishes due to a drop in value, that's going to cause complications for both the homeowner and the lender," he said.

© 2005 The Business Journal of Kansas City