Thursday, March 17, 2005

Red-hot housing market may cool down soon

By Shihoko Goto
UPI Senior Business Correspondent

Washington, DC, Mar. 17 (UPI) -- Politics may divide the nation, but when it comes to real estate, it seems that the market looks good everywhere across the United States. But for many analysts, the continuing rise of housing prices is no longer something to celebrate, but rather an issue that is making them increasingly anxious of a potential fall in the market.

On Wednesday, the Department of Commerce reported that housing starts to build new homes reached a 21-year high of 2.195 million units on a seasonally adjusted annual rate in February, the highest figure since February 1984 when starts reached 2.260 million units.

Surprisingly enough, the news came even as the Mortgage Bankers Association reported on the same day that mortgage rates were inching up, and likely to continue rising, given the likelihood of further interest rate hikes in coming months.

So no longer does the argument hold that rock-bottom lending rates are keeping the housing market red-hot. And no longer do economists argue that real estate is propping up an otherwise lackluster economy, as they had done following the burst of the stock market in March 2000.

Rather, the question now is whether the housing market will follow the way of stocks five years ago and burst, especially if current prices are wildly disproportionate to what the market is actually worth. For instance, NAHB estimates that the average home price nationwide was $281,900 in January this year, compared to $200,100 in January 2000. But of course, metropolitan areas have seen prices easily double in some districts even over a three-year period as homes remain a seller's market. San Francisco's Bay Area, which has seen some of the biggest surges in housing prices over the past five years, reported that the median price for existing homes reached an all-time high of $569,00 in February, surging 19.5 percent from a year ago and up 2.3 percent from the previous month.

Such numbers should be music to the ears of those in the building industry, but even they are beginning to fret about the situation being unsustainable.

So while the chief economist of the National Association of Home Builders was quick to welcome the latest data, even he could not help by point out that such conditions were unlikely to last.

"Builders are reacting to strong demand in the single-family home and condominium markets, both of which continue to cry out for supply. Stronger job prospects are also fueling the rental market," said NAHB's David Seiders, but added that "we do expect housing to plateau as the year progresses, other components of the economy pick up more steam and the interest rate structure moves up further."

One key factor that has driven up property prices, and also spooked many industry analysts, is the fact that more and more investors are turning to real estate as a place to put their money, rather than into stocks and bonds, given their relatively low rate of return until recently. Meanwhile, those who were badly burned by the burst of the dot-com bubble, of which there were only too many, continue to remain wary of the financial markets and instead have sought out more tangible assets among which real estate has been particularly attractive.

In fact, the National Association of Realtors reported earlier this month that 23 percent of homes sold in 2004 were as second homes, largely for investment purposes. Moreover, the association found that most of those buying second homes were middle-income people buying up properties on the lower- to mid-range of the pricing scale.

But even the head of the NAR warned that speculators shouldn't expect to get rich quick on real estate.

"It's true that some people have made fast profits, but it's not to be expected. In fact, in can be risky, and prospective buyers need to be aware of the facts before they think about jumping in," said NAR's president Al Mansell.

The association stated that as a rule, a "normal" real estate market which is balanced between buyers and sellers, housing prices would rise at rate of inflation, plus one to two percentage points, which requires buyers to hold onto the home for at least three years to build up enough equity to make a profit.

By that definition, the property market is certainly over-valued, and NAR's Mansell warned that "if the timing of your purchase coincides with the top of local market prices and you're hoping for quick gains, you'll be sorely disappointed."

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