Recession proof,
While so much of the economy languishes, real estate sector just keeps expanding, defying both downturn and precedent
boston.com
By Scott Bernard Nelson, Globe Staff, 3/3/2002
Fred Meyer had planned a winter vacation in Florida this year, but he's been too busy to get away. He's not complaining.
The Cambridge real estate agent says he closed a sale last week on a mid-sized Victorian house just off of Brattle Street for $1.8 million - $110,000 more than the seller's asking price.
''It's still happening out here,'' Meyer said, of the real estate boom that has marched along steadily since the mid-1990s.
When the nation slipped into a recession more than a year ago, the impact was harsh and immediate: The stock market dived and has yet to mount a sustained recovery. Hundreds of thousands of workers were laid off as companies slashed spending and shut facilities. Suddenly, the Internet era, with its promise of boundless growth and riches, seemed like a distant memory.
But the real estate bubble that was a major component of the economic runup of the late 1990s didn't burst when the downturn hit - and it's still expanding. It is a phenomenon without recent precedent; declines in home sales and construction usually set off recessions. This time, real estate values and sales of existing homes are continuing to rise, defying a recession that has, to varying degrees, hurt most other areas of the economy.
''People are asking themselves, `What is happening here?''' said Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. ''Historically, this is very, very unusual.''
Other than a temporary dropoff in sales after the Sept. 11 terrorist attacks, there have been no signs that the home boom is weakening. Last week, the National Association of Realtors reported that sales of existing homes nationwide increased nearly 15 percent in January, compared to the same month in 2001. In Massachusetts, single-family home sales soared by 18 percent and condominiums by 23 percent from last January.
All this activity has helped keep the recession relatively mild, as the ripple effects of the boom are felt throughout the economy. Low interest rates, which have been fueling home sales, have also led to a wave of refinancings of existing mortgages. In many cases, according to lenders, homeowners with increased equity are taking back cash and spending it on renovations or other consumer purchases. Low interest rates have also supported a steady increase in recent years in new home construction.
''The housing market has been very instrumental in keeping the economy together,'' said Mark Zandi, chief economist at Economy.com. ''This would have been a much more severe recession if the housing market had not held up as well as it has.''
Federal Reserve chairman Alan Greenspan implied as much during congressional testimony last week. He cited steady home sales during what has been an unusually warm winter in many areas of the country and mortgage refinancings as key reasons he believed the economy was close to staging a recovery.
But the home boom has been going on for some time. Between the first quarter of 2000 and the end of last year, the median sales price of existing single-family homes nationwide increased 10.9 percent. In Greater Boston, they increased almost 16 percent, making the area the nation's second most-expensive market, behind San Francisco. The stock market, as measured by the Standard & Poor's 500-stock index, lost more than 23 cents of each investment dollar during the same period.
Stock price gains easily eclipsed increases in home prices during the height of the bull market from 1995 through early 2000. But owning a home in the Boston area over the past seven years has been almost as good an investment as a diversified basket of stocks - with much less volatility.
Having seen the market plunge back to earth after the dramatic dot-com collapse, Americans are clearly looking for other investment options. And in many cases, real estate is one of the most attractive alternatives.
''Part of the story behind the housing market is a portfolio balancing story,'' said Karl Case, a Wellesley College economics professor and cofounder of Case Shiller Weiss Inc. of Cambridge, a real estate research and consulting firm. ''You have a stock market that has earned very big gains and that is very volatile, so people want to diversify out into real estate.''
But the most important factor behind the home boom has been the historically low interest rates that have followed the Federal Reserve Board's 11 reductions in the benchmark overnight bank lending rate.
In January 2000, a 30-year fixed rate mortgage averaged 8.2 percent, falling below 7 percent a year later. For each point rates fell, the average homeowner who refinanced saved $150 to $200 per month. The lower rates have made it easier to own a home and changed the way many Americans view their mortgages.
''In the past, when people saw a recession coming they worried about their jobs and didn't want to saddle themselves with mortgage debt,'' said Retsinas of Harvard's Joint Center for Housing Studies. ''Now some people see their homes almost like personal ATMs. It's so easy to refinance or get a home-equity loan ... that one of the big barriers has been removed.''
Todd Buchholz, a former White House economic adviser, estimates refinancings boosted consumer spending by $50 billion last year, helping to soften the blow of the flagging stock market and severe cutbacks in business spending.
Buchholz cites California's recent experience as an example of how the real estate boom moderates economic troubles. The state experienced an energy crisis in early 2001 that resulted in soaring monthly utility bills for many residents and placed a huge drag on the state's budget.
''Most economists thought California would go into a full-blown depression, not a recession,'' said Buchholz, who recently released a study on the new role of housing in the economy. The falling interest rates that bolstered home sales, refinancings, and new home construction, he said, ''played a huge role in allowing consumers to maintain their composure.''
Another factor supporting the housing market is the evolution of the mortgage finance world.
Until recently, mortgage loans were made mainly by local bankers based on local conditions. By last year, however, two-thirds of home loans were backed by investors in secondary markets. The fact that most mortgages are sold rather than held by local banks makes the market nationwide less volatile and less likely to dry up if one region's economy struggles.
''Now we have a system that feeds off global capital markets, so we don't have the starts and stops that we used to have,'' said Retsinas. ''You have a much more efficient housing finance system, so efficient that it makes the home even more of an asset-building strategy than it has been historically.''
The housing boom has also seen a rising tide of first-time buyers, especially minorities, immigrants, and senior citizens.
Both the Clinton and Bush administrations have extended homeownership to new buyers through Fannie Mae and Freddie Mac mortgage programs, with some success. Meanwhile, thanks to longer lifespans and changing lifestyles, older Americans are more likely to buy a home than in past generations.
The combination of low interest rates and more flexible financing has created a steady demand for housing at all levels of the market. ''The fundamentals for housing are a lot stronger than the fundamentals for Enron or E-Toys,'' said Buchholz. ''Assuming unemployment and interest rates don't go crazy, I don't see any reason for that to change.''
In his semiannual economic report to Congress last week, Greenspan predicted the nation's jobless rate could rise from 5.6 percent to 6.25 percent before the year is out. And he said he believed inflation will remain relatively low.
If either or both assessments are overly optimistic, the home boom could go bust. ''If you look back at earlier periods where it has actually tanked, it's in the face of a more severe economic decline than we have seen so far,'' Case said.
Goldman Sachs analyst Ed McKelvey forecast last week that home prices will continue to rise in the next year or two, but at a considerably slower pace. McKelvey predicted that housing prices will increase 3 to 4 percent a year, less than half the annual increases nationwide over the past two years.
That forecast is consistent with what many economists and other analysts are predicting: sooner or later, the home boom will slow.
But Concord real estate agent Nancy Edmond, president of the residential division of the Greater Boston Real Estate Board, sees no signs of that happening soon. A full month before the spring homebuying season traditionally kicks off, Edmond says her phone has been ringing off the hook.
During the first two months of the year, she says, agents have sold 490 homes costing $400,000 or more in the Boston area, up from 436 a year ago. As long as the overall economy takes a gentle growth pattern out of the recession, she says, interest rates are likely to remain low and housing will stay strong.
''The people I'm talking to in other parts of the Boston area are fairly unanimous that it's still hot everywhere,'' Edmond said. ''This was a very different recession, and I think it's going to stay a very different type of housing market for quite a while.'' |
