Real estate booms not always followed by busts

Economists weigh in on debate
By: Tom Kelly: Inman News
WASHINGTON, D.C. – How do you define a housing boom? Does a bust always follow a boom? What's the difference between a significant slowdown and an absolute bust?

With real home-growth prices (appreciation minus inflation) rising to their highest levels since the data was first collected in 1977, the Federal Deposit Insurance Corp. has brought some definition to the amazing national housing picture, announcing that there were 55 boom metro markets at the end of 2004, up from 32 a year earlier.

Boom markets, where real price-growth increases at least 30 percent over three years, were heavily concentrated in California (21), the Northeast (18) and Florida (11). And, according to the FDIC, boom does not necessarily lead to bust – only 17 percent of all housing booms ended in busts. Most busts were preceded by a significant stress in local economies, such as loss of jobs. A bust is defined as a nominal drop of 15 percent over five years.

"One of the factors that is fueling this market is the number of investors who have no intention of ever occupying the home they are purchasing," said David F. Seiders, chief economist for the National Association of Home Builders. "In fact, some of them have no intention of even renting them out. But when you look at the risk involved, you begin to understand why they are investing in the housing market."

Seiders and other analysts say that the two other factors contributing to the run-up in sales and prices are the prevalence of "innovative" mortgage products and lower-than-expected interest rates. More European dollars, especially from France and The Netherlands, have also been dumped into United States Treasury securities, surprising bond traders and supporting lower long-term home mortgages rates.

"I think the bond market has totally misread the tea leaves," said Seiders, who, like most everyone, thought higher home-loan rates would have begun to reign in home-sale activity by now. "Long-term rates have continued to go down, yet I do think they will begin to move up toward the end of the year. I just don't know when they are going to behave as I have forecasted."

What caught the housing industry by surprise was the recent statement by Richard W. Fisher, president of the Federal Reserve Bank of Dallas, that the country was "in the eighth inning" of a monetary tightening process, sending long-term interest rates lower and the stock market higher.

David Lereah, chief economist for the National Association or Realtors, said that some of the financing tools offered by lenders to investors really amounted to renting because there was no positive stake in the property.

"If you take out an interest-only loan or a negative amortization loan, is it really owning?" Lereah asked. "It's more like renting. And, if you end up owing more than you originally borrowed, it's not going to help anybody involved."

The most worrisome aspect of the current housing market is the "hidden supply" of homes – those units swept up by investors that will be put back on the market after making a quick buck or at the first sign of a housing decline. Jack McCabe, managing partner of a Florida-based research firm, estimates 70 percent of some Florida condominium communities in the past few months will be back on the market within two years. John Cox, senior vice-president for Avalon Bay Communities, said the percentage was about 25 percent in the District of Columbia area.

"Some of these people see what has happened the past few years, think they are going to make $100,000 in a hurry and then put the place back on the market," McCabe said. "That's going to create downward pricing pressure. We will get to a point where people will not pay over-inflated prices."

Seiders said some builders were so concerned about "hidden market" homes that they were writing contracts that included a $50,000 penalty if the home were sold within 12 months of purchase. Or, the builder had the right to repurchase the home at the original sales price, plus a modest increase.

"Some builders were reporting that the $50,000 penalty was even going to stop them from selling within a year," Seiders said. "They anticipated their gain would be much greater."

Sounds like many folks are still betting on the boom.

Tom Kelly's new book "The New Reverse Mortgage Formula" (John Wiley & Sons) is now available in local bookstores and on Amazon.com. Tom can be reached at news@tomkelly.com.