Tuesday, February 08, 2005

Will housing prices pop?

Experts debate if the housing market is an overinflated bubble, or a strong seller's market.

By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - Is the real estate market a dangerously overvalued bubble that needs to pop sooner than later, or is the market for homes strong enough that prices can and will keep rising?

Both answers were argued at a forum on the state of the real estate market Wednesday, along with a the middle ground that the market is more or less valued just right in its current form.

The forum was sponsored by Demos, a public advocacy group that among other issues concentrates on questions of economic opportunity. While the group has put out its own papers posing worries about the current debt levels among the middle class, its panel presented a wide range of views on the state of the real estate market.

Arguing that the real estate market is a bubble certain to pop, probably sooner than later, was Dean Baker, co-director of the Center for Economic Policy Research, a Washington think tank. He presented data showing that while housing prices generally tracked close to the overall inflation rate for nearly 40 years starting in the mid-1950's, home values have grown about 40 percent in real terms since 1995. He said that's the kind of rapid rise that is not justified by the fundamentals. He compared it to the late 1990's stock market bubble and in the Japanese real estate market in the 1980's before prices there collapsed.

"There's a speculative mentality of people thinking housing prices will only go up," he said. "That's not the real world."

Baker's position was challenged by Jonathan McCarthy, a senior economist with the Federal Reserve of New York, as well as Barbara Corcoran, founder of the Corcoran Group, a leading New York real estate firm.

McCarthy argued that issues such as home improvements and income growth have helped to support some of the basic fundamentals of the market. The home improvements have increased the underlying value of the homes more than simple home price data would not capture, he said, and the combination of income growth and low interest rates have increased the affordability of homes even faster than home prices have climbed.

"If there's a bubble, prices have been bid up beyond the underlying fundamentals, and buyers have done so in the expectation that prices will continue to rise," he said. "Rapid price increases are not sufficient to say that there is a bubble out there."

McCarthy did not dispute that there were some markets where housing prices have outstripped fundamentals, but he said that they are mostly along the eastern seaboard north from Washington D.C., as well as along the West Coast. "These areas will always tend to be more volatile," he said. "But on a national scope there's probably no housing bubble."

Corcoran challenged McCarthy's view that places like New York may be in a housing bubble. She confessed that as a real estate agent her view is biased. "I can't afford to be open minded," she admitted to laughter of the crowd.

She pointed to a few key numbers she sees that suggest even a supposed bubble market like New York City is in much stronger shape than before housing prices collapsed there, with the 1987 stock market crash.

"Today seven out of 10 listings here are selling at or above the asking price," she said. "In 1987, before the stock market rash, it was three out of 10. When I compare the number of listings over the last year, it's down 40 percent from the previous year. This is a hell of a seller's market."

"I would not be the least surprised if prices go up 25 percent in the next year, even if people out there think I'm smoking dope," she added. "There's too short a supply, too many buyers." Top of page