Industry Experts Debate Housing Market's Future
By PATRICK BARTA
Staff Reporter of The Wall Street Journal
<<On Aug. 24, the Commerce Department reported that sales of new homes surged 4.9% in July, compared with June. On Aug. 27, the National Association of Realtors said existing-home sales slowed in July but remained near historic highs.
A central pillar of the economy, and one that has helped offset the current business slowdown, housing has been the focus of intensifying scrutiny as other industries have sputtered. The fearful question: Will housing fall, too?
The answer now appears to be no. The home-sales market boasts fundamentally strong features that at least for now appear likely to help it weather a storm.
These features include a relatively tight supply of homes, greater-than-expected population increases that swell demand and continued low mortgage rates. Loan-assistance programs introduced in the 1990s by lenders and government agencies have effectively offset rising home prices and further boosted demand. Even Wall Street's swoon seems to be helping indirectly, prompting some wealthier people to switch money from stocks to real estate.
There are some ominous signs on the housing front. In certain local markets where values skyrocketed in the late 1990s -- for example, San Francisco and Silicon Valley, Manhattan, Denver and Austin, Texas -- values could drop sharply, as demand generated by the now-fizzled technology boom dries up. Already, some sellers are having to cut their asking prices.
Worst Case
Sharply higher mortgage or unemployment rates could sink home sales. A broad, deep recession would drag down housing, along with the rest of the economy. But many economists doubt these dire developments will occur. While nationally the housing market is likely to cool off over the coming year, forecasters expect sales and prices to continue to grow -- at a much slower pace.
This is important because home selling has a ripple effect throughout the economy. When people buy homes, they tend also to buy new furniture, appliances and electronic equipment. On a psychological level, consumers whose homes are rising in value feel wealthier and are more likely to spend money on things unrelated to their homes.
In the most overheated local markets, some owners are feeling less wealthy than just six months ago, as buyers grow more cautious. In Denver, where prices soared 38.7% in inflation-adjusted terms over the past four years, the number of properties waiting for a buyer has risen to the highest level in nearly 11 years. Home prices rose 63% in inflation-adjusted terms in San Francisco over the same four-year period, with the median hitting $483,600.
But prices nationwide grew at a far-more-subdued 18% in inflation-adjusted terms over the past four years, according to the U.S. Office of Federal Housing Enterprise Oversight in Washington. That is the fastest four-year pace since the mid-1970s, which is as far back as the agency's data reach.
Encouraging Fundamentals
In short, the overall housing run-up has been relatively moderate. And a look at the home market's fundamentals reveals other encouraging indications.
Demand is high, and supply isn't abundant. Recently-released U.S. Census data suggest that in the 1990s, developers didn't keep up with a boom in immigrant and single-parent families that created hundreds of thousands more households than anticipated. The number of new households increased by 1.35 million a year in the 1990s, about 200,000 more a year than previously estimated, and higher than the 1.26 million households created each year in the 1980s.
The new families helped push the national vacancy rate for owner-occupied homes down to 1.7%, from 2.1% a decade earlier, implying that demand grew faster than supply during the decade. Before the 2000 head count, many demographers and industry economists had underestimated total U.S. population by about six million people.
"Each of those six million people had to live somewhere," says David Berson, chief economist at Fannie Mae, the big mortgage-finance company. "If the U.S. economy falls into recession, housing will slow as well. But with so many more people in the economy, the reduction in housing demand will also be less" than in past cycles.
As of July, sales of existing homes were running at an estimated annual rate of 5.17 million units -- down 3% from June, the National Association of Realtors reported. That rate was lower than economists had expected but would be just shy of the all-time annual sales record of 5.21 million units in 1999. Housing statistics are notorious for lagging behind broader economic developments, but the Realtors forecast total sales for 2001 of 5.18 million, which would be the second-highest on record.
Declines in California, Massachusetts and North Carolina are being offset by rapid growth in states such as Nevada. Sales of existing houses, condos and co-ops surged 32%, to an annual pace of 73,400 units, in Nevada in the second quarter of 2001, compared with the same period last year. In all of 1998, the state recorded only 38,400 sales.
There are other indications of tight supply, as well. During the 1990s economic expansion, builders in most areas kept new construction in check, partly because it is getting tougher to obtain permits and cheap land.
Builders broke ground on about 1.23 million homes last year, slightly fewer than the year before. By comparison, builders put up more than 1.4 million new homes in 1977 and again in 1978, at a time when the U.S. population was much smaller. Partly as a result of last year's moderate building pace, economists estimate that if new construction ceased today, it would take only 3.8 months to sell all of the new homes on the market -- the tightest supply on record. In 1990, it would have taken more than eight months to use up the supply of new homes.
Many municipalities have restricted suburban sprawl. In one extreme example, the small Texas town of Flower Mound placed a temporary moratorium on new subdivisions in 1999, after concern mounted that the fast-growing Dallas bedroom community couldn't keep up with demand for roads, sewers and the like.
Looking to the future, builders aren't expecting a market collapse. Home-construction starts grew 2.8% in July, to their highest level since February 2000, according to the Commerce Department. Builders broke ground last month on new homes at a seasonally adjusted annual pace of 1.67 million units.
Lower Rates
On top of rising demand and modest supply, low interest rates and mortgage-assistance programs have made home ownership possible for a widening pool of people.
In mid-August, the average rate for a 30-year fixed-rate mortgage fell to 6.91%, only slightly above the 30-year low of 6.49%, according to Freddie Mac, the other big mortgage-finance company. (Rates for "jumbo loans" of more than $275,000, are usually higher.)
The low rates are due largely to fears in the bond market that the economy hasn't yet begun to recover. This concern increases demand for long-term bonds, which are seen as a safe investment. That demand pushes down interest rates, including those on home mortgages.
Mortgage rates could rise if nervous foreign investors pull out of the U.S. bond market. But economists predict that any increases aren't likely to be severe enough to throw the housing market into a tailspin.
Loan Deals
An array of loan programs introduced in the last decade by lenders, consumer advocates and state governments have combined with favorable interest rates to put mortgage financing within the reach of more consumers, including many in communities where the percentage of homeownership has historically been low.
Consider the case of Brad Dieckmann, a 29-year-old auto mechanic in Louisburg, Kan., and his wife, Erin. Even though they didn't have the money for a down payment, the couple recently bought a $110,000, five-bedroom ranch house near Kansas City. Through a state program designed to boost home ownership among lower-income families, the Dieckmanns received a $16,500 loan for the down payment. If they keep the house for 10 years, they don't have to pay the money back. With that help, they were able to qualify for a 7.25% U.S.-backed mortgage from the Federal Housing Administration.
In the absence of the state aid, the couple wouldn't have been able to afford a home, Ms. Dieckmann says.
Other programs, including those operated by Fannie Mae and Freddie Mac, allow borrowers to finance as much as 97% of the value of a home purchase, compared with the more customary 80% to 90% of years past. As one illustration of the boom in these programs, Fannie Mae in 2000 guaranteed $5.8 billion in loans with down payments of less than 5%, up from only $96.7 million in 1990.
Foreclosure Fears
Widely available loan programs offering easier terms are beginning to bite some lenders and could lead to greater restrictions in the future if foreclosures rise significantly. In the subprime-mortgage market, which caters to high-risk borrowers, the percentage of mortgages in foreclosure stood at 3.72% in May, according to Mortgage Information Corp., a San Francisco research firm. That's up from 3.51% at the end of 1999. Personal bankruptcies are rising, too. There were about 390,000 nonbusiness bankruptcies filed in the second quarter of 2001, up 23% from the same period a year ago, according to the American Bankruptcy Institute, a trade group.
But for the larger prime market, which accounts for 85% of all mortgages, foreclosures remain relatively low. At the end of the first quarter of 2001, 0.9% of all prime mortgages (combined with loans insured by the Federal Housing Administration) were in foreclosure, according to the Mortgage Bankers Association of America, a trade group in Washington.
The combination of favorable rates, wider loan availability and continuing low unemployment doesn't mean "that we're recession-proof for this sector, but it does mean we're a little less likely to get so far out of balance that it requires a severe retrenchment," says Stephen Stanley, an economist at the bond-trading firm Greenwich Capital Markets in Greenwich, Conn.
Fleeing Stocks?
There are other, harder-to-quantify forces bolstering the housing market. Some upper-income Americans, spooked by the stock market's swoon over the past year, appear to be shifting money into residential real estate, according to brokers and economists.
One signal of this is the increase in average down payments in the past two years. Some buyers may be investing large sums of money that they previously might have put into the stock market. In June, according to Economy.com, a West Chester, Pa., consulting firm, the average down payment nationally was $34,700, up 14% from a year earlier and 21% above June 1999.
Douglas Andrus, owner of Prudential Grosse Pointe Real Estate in the wealthy Detroit suburb of Grosse Pointe Woods, Mich., points to one of his clients, a doctor, who pulled several hundred thousand dollars out of the stock market a year or so ago and has been buying real estate. So far, the doctor has bought four homes, valued at a total of about $720,000, which he intends to rent, Mr. Andrus says. Such buyers are "giving a kick to the market," the broker adds.
This kind of investment won't save the housing market if the national economy crashes. Even a small drop in home prices could wipe out families who have borrowed heavily against their homes in the past year through "cash-out" refinancings, in which borrowers pay off their original mortgages and take out bigger loans, in many cases pegged to the assumed increase in value of their houses.
But prices would have to drop a long way to hurt many of the owners who have made a lot of money on their homes in recent years. Steven Livitz, a 34-year-old stock trader, and his wife, Stephanie, recently shaved $16,000 off the $575,000 asking price for their four-bedroom home in the hills of Austin. The house had sat on the market for almost a month. But even if they have to discount further, Mr. Livitz says, they will still make a bundle because of the rapid appreciation of the house, for which he paid less than $400,000 six years ago.
Austin's high-tech growth engine has stalled, but Mr. Livitz says, "I'm not too worried." He sees a lot of homes on the market and potential buyers waiting for prices to drop a bit. But, he adds, "we can sit tight for a little while.">> |
