Housing boom won't let up

Economists poke holes in real estate 'froth' worries
By: Glenn Roberts Jr.: Inman News
Real estate industry economists today downplayed Federal Reserve Chairman Alan Greenspan's comment last week about "froth" in home-price appreciation in some markets and presented forecasts for continued strength in the housing market, at least through the end of the year and likely carrying into 2006.

"Yes, there is froth in the markets, but froth can be healthy," said David Lereah, chief economist for the National Association of Realtors. "It's not a bad word."

Home-price gains can be more about supply and demand than they are about bubbles, he said. Lereah referenced a report citing double-digit price gains in 66 U.S. metro areas in a 12-month period. "That doesn't mean there are 66 metros that are having bubbles." Rather, he said, they represent "66 metros where the demand is clearly higher than the inventories of homes in those local markets." Even so, he acknowledged that double-digit price gains cannot continue indefinitely, and inevitably that pace will slip off. "It's not sustainable," he said.

Greenspan said during a Fed meeting June 9 that a nationwide housing "bubble" does not appear likely, though "there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels." Greenspan also said that the "apparent froth in housing markets may have spilled over into mortgage markets," and expressed particular worries over a rise in interest-only and "other relatively exotic forms of adjustable-rate mortgages."

Today, real estate economists representing major real estate trade groups and mortgage entities fired back with their optimistic forecasts for a booming housing market that has so far refused to wither or die. The economists represented members of the Washington, D.C.-based Homeownership Alliance, which includes a coalition of about 15 housing-related organizations.

All of the economists agreed that the still-low long-term and short-term mortgage interest rates are likely to rise through the end of the year, and that the continued strength of the housing market owes a lot to those low rates. But demographics, including new immigration and population growth, also play a powerful role in the continuing boom, they said.

Frank E. Nothaft, chief economist for mortgage industry giant Freddie Mac, acknowledged that "there are signs of 'suds' around the country," though the overall housing market remains hot. The dollar volume of mortgage originations should drop 5 percent to 8 percent this year, he said, due largely to a lower share of refinancing activity. Refinancing accounts for about 40 percent of all mortgage originations activity, he said, which is the lowest share in five years. Meanwhile, purchase-money originations are up but not enough to offset the larger trend in reduced refinancing.

Five-year adjustable-rate mortgage products have become "a dominant product" among alternative loans, account for about 40 percent of all adjustable-rate mortgages, Nothaft also said. He estimated that long-term interest rates should gradually reach 6 percent by the end of the year, from a current rate of about 5.65 percent.

Also, he said, "I think we'll see some gradual moderation in house-price valuation over the next couple of years," with about a one-in-three chance of a region in the country seeing stagnant or declining home values over the next couple of years, linked to regional economic weakness.

David Seiders, chief economist for the National Association of Home Builders, said, "The performance of the housing sector so far this year certainly has exceeded our collective expectations largely or at least partly because long-term interest rates basically have refused to go up."

Seiders and other economists expressed some worries about the level of investor and speculator activity in the real estate market, and about how the real estate market might react to a rise in interest rates.

While some home-price increases exhibit boom conditions, Seiders questioned, "Will there be some price bust following behind?" He projected continuing economic growth through the rest of the year, with an expected record in new-home sales.

Lereah, meanwhile, forecasts a record 6.89 million existing-home sales in 2005.

Worries about a growth in alternative forms of home loans are exaggerated, said Paul Merski, chief economist for the Independent Community Bankers of America. Merski said, "Bankers are being very diligent now about their lending practices," and the FDIC is "closely monitoring bankers' lending practices right now due to the long run in the housing boom."

"(The notion) of exotic products out there that are extremely dangerous is well overblown," Merski said. Zero-down payment loans are probably more dangerous as they tend to have a higher default rate, he said, though these types of loans account for a much lower share of the overall market. Bankers do worry about repayment risk, Merski said, and closely watch home builders' inventory of unsold homes.

Merski also addressed the issue of home-price "froth." He said, "Economists have a saying that unsustainable trends will not be sustained," and that may hold true for some markets that have rapid, double-digit price appreciation. He forecast a "reasonable cooling off in certain markets in the prices but certainly no crashes in these markets because of the strong demand." Even so, the overall housing market should be strong for the rest of the year and going into 2006, he added.

And David W. Berson, chief economist for Fannie Mae, a sister entity to Freddie Mac and key player in the secondary mortgage market, said, "There are no signs of any slowing in the housing market at all. You need a pretty good decline for the second half of the year not to set a record this year."