By Susan Romero
Fannie Mae Chief Economist David Berson said there is no housing "bubble," and he believes any economist who says otherwise is "a charlatan."
His comment reveals a certain weariness among economists and industry experts who've worn themselves out explaining why they believe the housing market isn't over-inflated or due for a correction. The housing bulls all point to the same evidence and intone a similar mantra.
Ken Goldstein also is among those who have tired of discounting the "bubble" theory. The Conference Board economist said the task is akin to telling Chicken Little the sky isn't falling. He said anyone looking for a bubble isn't likely to find it this year or early next year.
And, indeed, much of the data supports this position. Could record home sales, record home price appreciation and record low interest rates add up to a weakening housing market?
Assuming as economists so often warn that the past isn't an accurate predictor of the future, there still are many other factors to consider. Demographic trends, Americans' view that housing is a good investment, government policies that keep interest rates low and encourage homeownership, and zoning and growth restrictions are expected to sustain a healthy demand for and constrained supply of homes and help prevent house price declines for the foreseeable future.
Economists generally agree that historically low interest rates have been the primary fuel driving record-high home sales.
"You have to put interest rates first," said Stan Ross, chairman of the University of Southern California's Lusk Center for Real Estate in Los Angelescolor>. "Low rates make (home buying) very appealing, especially in terms of being able to upgrade (to a more desirable home)."
The combination of low interest rates and easy-qualify mortgages has opened the homeownership door to millions of low- and moderate-income people who in years past wouldn't have been able to afford to purchase a home. These buyers contribute to the huge demand for housing that results in escalating and arguably sustainable higher house prices.
"Despite the upward trend in home prices, millions of lower-income households have made the transition to homeownership in recent years," stated a report from Harvard University's Joint Center for Housing Studies.
The fact that Baby Boomers are in their peak earnings years also argues for a strong housing market. Boomer homeowners today can sell their current houses at attractive prices to entry-level buyers, then use their accumulated equity and low-cost mortgage financing to buy higher-priced bigger or otherwise more desirable houses.
DataQuick analyst John Karevoll pointed to the current ratio of entry-level and mid-level buyers to the move-up and prestige-home buyers and said he hasn't seen a more balanced housing market in the last 15 years.
"The market is at remarkable equilibrium right now," he said.
The build-up in home equity which soared to a record $6.7 trillion last year, according to Harvard's 2002 "State of the Nation's Housing" report is a crucial part of the trade-up scenario. Equity enables homeowners to leverage their starter-home investment into their next home, then leverage that next home into a luxury-class home or a second, vacation or rental home.
"For those who were able to afford a home, equity buildup was truly spectacular," the Harvard report stated. "Buyers who purchased a typical $125,000 home in 1995 and experienced home price appreciation at the national average rate saw a $27,000 increase in inflation-adjusted equity by the end of last year."
Populous coastal areas with high immigration, strong housing demand and limited inventory due to such geographical constraints as shorelines or restrictive growth initiatives experienced skyrocketing home price appreciation. Californian homeowners enjoyed 10 percent house price appreciation from 2000 to 2001, according to the California Association of Realtors.
Innovative mortgage products also add to the seamless flow of houses between first-time buyers and trade-up buyers and consequently have contributed substantially to booming home sales.
RealEstateConsulting.com President John Burns said the demographics that favor a continuing boom in homeownership are "phenomenal."
"Homeownership will rise by 22 million households over the next 20 years and renting will rise by less than 2 million.&Almost all of the demand is going into homes and the reason primarily has to do with rising homeownership among the Boomers," he said.
Burns added that 54 percent of home buyers purchase their first home by their mid-30s, but homeownership rises to 80 percent by age 70. That means the nation is due for a "huge surge" of home buyers in their '50s and '60s as the Boomers age.
Adding to housing demand is a shift in the way Americans view their homes. A recent Milken Institute study found housing today is the psychological equivalent of gold.
"Since the 1960s, Americans have looked to the stock market for investments; residential real estate was just a place to live. No more," stated the Milken report. "Much like gold in the 1970s, Americans now appear to be treating the purchase of residential real estate as the investment of choice in times of economic uncertainty."
The health of the overall economy also is an underlying argument in favor of housing market bullishness. After all, the strong housing industry brought the broader national economy through the recent recession with far less damage than otherwise might well have been sustained. Harvard's report noted that the housing sector "consistently contributes to nearly one-fifth of nation's gross domestic product" and "helped to ensure the 2001 recession was neither deep nor prolonged."
Could a sector that performed so well in tough economic times fail to thrive in an improving economy? Housing cheerleaders don't see that happening.
Bullishness among home builders is another sign of continued optimism. Builders constructed nearly 1.3 million single-family houses in 2000 and house construction starts are expected to total a record figure approaching 1.66 million this year, according to the National Association of Home Builders.
The total value of single-family housing construction activity last year set a new record of $206 billion, according to Harvard's report.
Production of 1,000 typical single-family houses generates 2,448 jobs in construction and related industries, which in turn generate approximately $79.4 million in salaries and $42.5 million in federal, state and local tax revenues, according to the NAHB.
Yet even the most bullish economists and experts who discount the existence of a housing bubble don't foresee continuing double-digit home price appreciation.
Nicolas Retsinas, director of Harvard's housing studies center, is among those who said double-digit home price appreciation isn't sustainable. But he thinks home values will more or less hold their ground due to strong demand and tight supply.
He said voters aren't going to be reading ballot measures asking whether they want to remove tracts of land from open space rolls and make them available for development and that lack of buildable land will limit the production of new houses.
"So we have strong demand (and) constrained supply it really is Economics 101," he said.
The National Association of Realtors predicted the national rate of existing home price appreciation will cool from 6.3 percent last year and a forecasted 6.8 percent this year to a more moderate level of 4.1 percent next year.
And even housing bulls are keeping a wary eye on certain hot markets where home prices have inflated wildly.
The housing market is not one all-encompassing national market, but rather real estate is and always has been local. That means some markets naturally are more vulnerable than others to housing price corrections.
Economists said vulnerable markets could be hurt by rising interest rates, higher unemployment, a double-dip recession or other factors that would adversely affect consumer confidence and the local economy.
"The expensive coastal markets that are virtually built-out are more vulnerable to a home price decline," said Burns, whose research found houses were unsustainably overpriced in 17 of 24 major metropolitan areas. He categorized three areas, Boston, San Diego, Calif., and Fort Lauderdale, Fla., as "potential bubbles."
Fourteen other metropolitan areas that Burns categorized as "over-priced" based on the local median home price and median income are San Francisco, Los Angeles, San Jose, Sacramento, Orange County and Oakland, Calif., Portland, Ore., Phoenix, Denver, Minneapolis, New York City, Charleston, S.C., and Miami and Tampa, Fla.
"The (home) price to income ratio (in those markets) is much higher than usual. And if you look at those markets over time, they're the markets that tend to cycle the hardest. They tend to have 80 percent appreciation over three or four years, followed by a 10 percent decline over seven years or something along those lines. Markets that meet supply and have buildable land don't experience a lot of appreciation and they don't decline because of it," he said.