US housing bubble spreads
Andrew Ward | Bloomberg
2005/05/19
From Jackson, Mississippi, and Wichita, Kansas, to Rockford, Illinois, and Green Bay, Wisconsin, housing prices are rising at more than three times the rate of inflation.
This is increasingly worrying to economists such as Dean Baker, co-director of the Centre for Economic and Policy Research, a Washington group that analyses public policy. The US was in a housing bubble that couldn't last, he said.
"We may be seeing the bubble spreading" from the east and west coasts to inland areas, Mr Baker said. "People are buying homes every day and paying much more than they'll be able to sell them for."
Median home prices rose more than 10 per cent in 66 of 136 US metropolitan areas over the past year, the National Association of Realtors said. That's the most cities with gains of more than 10 per cent in 25years of record keeping.
Home prices have surged in New York, Los Angeles and Washington and in coastal towns in the south and west as mortgage rates have fallen to near-record lows. The three fastest-rising markets were in Bradenton, Sarasota and West Palm Beach, Florida, where prices rose by 36 per cent to 46 per cent from a year earlier.
The trend is spreading. Prices rose 16 per cent in Jackson, 14per cent in Rockford, 12 per cent in Wichita and 10 per cent in Green Bay. All four cities had bigger gains than a year earlier. Unemployment in each of the cities is higher than the US rate of 5.2 per cent.
"It is unusual that we are starting to see big price gains inland because there is a lot of land," said Mark Zandi, chief economist at US consulting company Economy.com. "You generally only see these kinds of price gains and speculation in markets that are supply constrained."
He said the US wasn't in a national housing bubble, although some markets in California, Florida and the north-east were. The median price of a previously owned home rose 23per cent in Washington, 21per cent in LA and 18 per cent in New York in the past year.
"If there are more Wichitas experiencing these price gains a year from now, this would be more of a national problem," he said. "With each passing day and each percentage point hike in house prices, the risks rise."
The median price of a previously owned home rose 9.7 per cent to $US188,800 nationwide in the first quarter compared with a year earlier, the association said. The US consumer price index rose 3.1 per cent over that period.
In Rockford, fewer houses on the market and competition from buyers in nearby Chicago helped raise prices, said Lee Nalewanski, the managing broker at Starck & Co, a real estate company in Palatine, Illinois.
"A year ago, in April 2004, the average sale price was $US118,000 and now it's almost $US135,000," the broker said. "Everybody's asking the same thing: how long can this train keep going?"
Employers in the Rockford metropolitan area cut 9400 jobs between March 2001 and March 2005, as the area lost a fifth of its manufacturing jobs. Rockford's unemployment rate was 6.1 per cent in March.
"In our area, we are starting to see some affordability issues," Mr Nalewanski said. "Even though the price increases haven't been that big, we've had a decline in salaries due to the exodus of manufacturing jobs and their replacement with service jobs."
Economists such as Mr Baker said the US was in the midst of a housing bubble that might burst and push the country into recession. "People are betting on the value of their homes rising, and they're not saving," he said. "This is a classic bubble."
The US personal savings rate fell to 0.4 per cent in March compared with the 4.8 per cent average of the past 30 years.
The fallout from the collapse of a housing price bubble would hurt consumer spending, which makes up 70 per cent of the US economy, he said.
"A lot of people are going to find themselves a lot poorer than they expected," he said. |
