Wednesday, June 28, 2006

Phoenix Real Estate Boom or Bust

Boom may roll, but bubble won't burst By Judy Stark St. Petersburg Times

It's everybody's favorite topic these days: What did you pay for your house a few years ago? What did you just sell it for? Nobody's shy about giving real numbers. Everybody wants bragging rights to the killing they're making in real estate.The big questions on everyone's mind: How long can the market go on like this? When will the bubble burst?

In the interest of making you sound smart at your next cocktail party, or as you wait for the opening kickoff, here's how David Lereah (say "le-ray"), Chief Economist of the National Association of Realtors, reads the tea leaves these days. Lereah, who scoffs at the notion of bursting bubbles, was in town last week to talk to the Pinellas Realtor Organization.

What's driving the white-hot housing market?

It's not just low mortgage interest rates, and it's not just people looking for somewhere other than the stock market to park their money. It's demographics, Lereah said, specifically these segments of the population:

Boomers

The oldest of the 76-million baby boomers, born between 1946 and 1964, are entering their peak earning years and represent "the greatest economic expansion ever."

Retirees

Thanks to good health care, older people live an average of five years longer. That means they stay in their homes five years longer, which creates a lean supply of homes for sale, hence higher prices.

Immigrants

It takes about a generation for immigrants to fully participate in the economy, and after record immigration in the last 15 years or so, those immigrants are now ready and able to become homeowners.

Boomer kids

They're the second-largest demographic group, and they're becoming first-time buyers. Is this irrational exuberance? "There's no irrational exuberance in buying a large, awkward, fixed asset," i.e., a home, Lereah said. Some of the speculators in the market may be irrationally exuberant (we'll deal with them in a minute). Some people say, "Oh, remember what happened to tech stocks a few years back, the bubble burst." Comparing a stock collapse with what some people predict is the bursting of the housing bubble "is apples and oranges," he said.

He contrasted tech stocks' overhyped rise and ignominious crash with the "healthy, prolonged expansion" of the housing market, starting with the refi boom of 1992 (when mortgages dropped to the single digit of 9 percent), followed by another refi boom the next year; the run-up in mortgage originations from $400-billion in 1991 to $4-trillion last year; and the increase in sales from 3-million in sales in 1991 to 8-million last year.

The U.S. housing market has survived mighty blows with a 2x4 in the last 10 years but has kept on ticking, indeed roaring. He enumerated the blows:

• 2001: Recession.
• Rising 30-year fixed mortgage rates, from an average 6.8 percent in 1998 to 8.3 percent in 2000. (They've dropped, of course, since then.)
• Loss of 3-million jobs from 2002 to 2003."The stars are aligned," Lereah said. "There's nothing irrational about it. People buy real estate because they have to. It won't end any time soon.

What fuels housing is demographics and household formation.

"Anything else nudging the market along? Sure. Technology: online real estate listings and processes that reduce the search costs. Lending technology that reduces the loan application time and has reduced the cost of loan processing by $2,200 in the last few years. Smart-growth legislation that has restricted supply.So is the bubble going to burst?No, Lereah said. "The air might come out of the balloon, but it won't pop." He thinks price increases have been healthy, driven by demand that exceeds supply.What else do you see out there?

Here's a wonderful term to drop around the office water cooler: "The rolling boom."

When one market starts to get overheated, people shop elsewhere nearby. Lereah offered this example: Las Vegas experienced price appreciation of 52 percent from 2003 to 2004. That priced it out of the reach of many buyers, who instead went to less-expensive Reno , where prices have now increased 32 percent, while Las Vegas has backed off to an appreciation of only 12 percent this year. Similar rolling booms occurred when Boston got too expensive, so people drove an hour south to Providence ; or West Palm Beach to Miami .

If the air starts to leak out of the balloon in the Fort Myers-Naples-Cape Coral area (where the median home price in the second quarter was $266,800, an increase of 45.2 percent over last year, second highest in the nation), the boom could roll to the Tampa Bay area, Lereah said.Now, what about those speculators? They bid prices up but they're the first ones out, Lereah said. He cited figures from Miami : 18 months ago there were 15,000 condos under construction; today, there are 75,000. "Generally housing markets are very, very healthy," Lereah said. "For specific local markets where there is lots of speculation and questionable loans," bubbles may burst.

Those questionable loans include interest-only mortgages, negative-amortization loans, low-documentation loans and option ARMs. "First-time investors are boarding this train, and they're making mistakes," he said.

So what can we expect in the next few months?

A soft landing is what you want, Lereah said. If the Fed raises interest rates slightly, that helps to gently slow a market. What keeps a boom alive is high prices, "and you want it to slow down. If we take our medicine now we'll be better off later."What's your take on Florida? Florida isn't San Francisco , where the median home price is $728,000, or Orange County , Calif. , where it's $600,000. (The median home price in the Tampa-St. Petersburg-Clearwater area is $195,000, an increase of 23.3 percent over last year.)"By 2040, Florida will double in population. It's the equivalent of the population of Pennsylvania and Maryland moving here," Lereah said. All those new residents will bring "trillions of dollars of wealth with them. It's a seismic shift." Florida will be a great market in the next 20 years. When I look at Florida , I see Las Vegas . I don't see the boom ending in Florida any time soon."

http://www.historiccentralphoenix.com/

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