By Mark Micheli, Journal Staff Despite pundits who predict the residential real estate bubble is about to burst, statistics show that the state's soaring market still has some gas left in it. "I don't think it will burst unless the economy tanks," said Karl "Chip" Case, an economist at Wellesley College and one of the country's leading authorities on housing bubbles. David Drinkwater, president of the Massachusetts Association of Realtors, agrees, saying, "The idea of a bubble bursting and prices falling is overrated. I don't see that happening." And a real estate economist at the Lusk Center for Real Estate at the University of Southern California goes so far as to say that the bubble won't burst because there is no bubble a classic real estate bubble is created by speculators hoping to make fast returns by buying homes and quickly selling them at a profit, according to Raphael Bostic, director of the USC Casden Real Estate Economics Forecast. In the Bay State's soaring market, the opposite is happening, said Bostic. "When buyers see home prices rising, they decide to jump into the market while they can still afford housing. This is perhaps the ultimate buy-and-hold strategy, just the opposite of speculation," said Bostic, a former senior economist with the Federal Reserve Board of Governors. He is a scheduled speaker at a two-day conference sponsored by Inman Real Estate News Service in Los Angeles early next year titled, "The Housing Bubble: Fact or Fiction." Similar seminars are being planned by groups across the country including the Greater Boston Real Estate Board, which has scheduled a luncheon later this month called, "Boom or Bust?" as more industry watchers speculate how long the real estate market can continue its rise. Bostic said people are anticipating a bust in the real estate market resembling the bust in the high-tech market and that is wrong, he maintained. Speculation that characterized the technology market just doesn't exist in the real estate market, he said, and the fundamentals that are holding the market up low interest rates, low unemployment, easy credit and low inventory should propel the market on its current course. "It's been a tremendous market for several years now, and this year is no exception," said MAR's Drinkwater, who owns Grand Gables Realty Group in Scituate. Drinkwater said he has seen no signs of the market weakening and that he has buyers waiting for more homes to be put on the market. Low inventory Sales of detached single-family homes fell 1.9 percent in June, 0.7 percent in July and 12.7 percent in August compared with sales in comparable months a year earlier, according to the latest statistics provided by the MAR. But the sales numbers are up this year if you compare the first eight months of 2002 to the same period in 2001. He attributes the drop in sales in June, July and August to a drop in inventory. As a case in point, active listings of single-family homes and condos were down by more than 10 percent in the third quarter of this year compared with the year-ago period, according to John Dulczewski, director of communications for the MAR. And the average number of days it took single-family homes and condos to sell was 49 days in this year's third quarter, down slightly from 50 days last year, according to statistics from the MLS Property Information Network Inc., which represents about 90 percent of the listings in the state. Drinkwater said he and other MAR members are not seeing a slowdown in buyers, either. He said that recent layoffs may be taking some people out of the market, but "not enough to tip the scales in the other direction." Wellesley College's Case watches the numbers of nonfarming payroll jobs closely and believes it is an important predictor for the real estate market. He said the market will flatten or fall only if the state loses jobs rapidly, something that has not happened yet. The state has lost about 2.7 percent of its jobs since the peak in March 2001, and the last time the real estate market dipped substantially between 1989 and 1991 job losses reached 11.5 percent. High demand Demand from first-time buyers is also high, according to Tom Gleason, executive director of the Massachusetts Housing Finance Agency, which underwrites low-interest loans for first-time buyers. Gleason said the June 2002 fiscal year end showed 35 percent more activity in his office than the year before. Low interest rates are also fueling the market, enabling buyers to afford larger mortgages and allowing home prices to rise. Industry officials worry that a Federal Reserve move to raises interest rates to curb inflation will slow the market. And although mortgage delinquency rates are rising, so far there are no signs that credit is tightening. "The credit spigots are still open as wide as I've ever seen them," said Keith Gumbinger, vice president of HSH Associates, a consumer loan information publisher in Butler, N.J. Gumbinger said lenders are being encouraged to keep those spigots open by investors who are taking their money out of stocks and putting it into bonds and mortgage-backed securities. "This money has to be put into play," Gumbinger said. He notes that although mortgage delinquencies and defaults are increasing "this is still a more acceptable risk than stocks." One part of the lending market that has tightened is for subprime borrowers those with poor credit histories. Gumbinger said that many companies that once serviced these buyers stopped over the past few years. The high end of the market homes costing more than $1 million is also reportedly seeing a slowdown in sales caused by the fall in the stock market. But don't tell that to Kevin Ahearn, president of Otis and Ahearn, which specializes in sales of homes in some of Boston's highest priced neighborhoods. Ahearn is one of the featured speakers at the Greater Boston Real Estate Board's "Boom or Bust?" luncheon. He said that although buyers are taking a little longer to look at inventory and get comfortable with prices, sellers are remaining patient. He said sales at the very high end costing $1,000 or more per square foot are on track to increase slightly again this year. "So far the market has been surprisingly consistent and strong," Ahearn said.
October 11, 2002