A CASE FOR NON-BUBBLE EFFECT IN HOME VALUES October, 2002 By Jim Woodard Many families who are interested in purchasing or selling a home are facing a unique dilemma in today’s real estate market. Prospective buyers wonder if the current high home prices are the result of a temporary “bubble” in values. If so, perhaps they should wait a bit for the bubble to burse, resulting in a rapid decline in prices. Sellers are also concerned about that possible bubble effect. Even though they have not reached the ideal time for selling their property, perhaps they should place their home on the market immediately while prices are high. Or maybe they should wait until values rise still higher. The same basic questions are pondered by homeowners who are considering a refinance of their mortgage. According to many experts, the home buying market is strong and stable, and will probably remain so for a considerable time in the future. “With prospects for the nation’s economy slowly improving, interest rates remaining historically low, and demand for housing continuing to be strong, there are few risks for a decline in housing prices on the horizon,” said David Seiders, chief economist for the National Association of Home Builders. “In an analysis of house prices nationally and in major regions of the country, it’s difficult, if not impossible, to find prices that look out of alignment with underlying economic fundamentals. With the economy and job market in the process of recovering and an interest rate structure that promises to remain historically low, it’s highly unlikely we will be hearing any sizable price bubble bursting this year or in 2003.” It’s interesting to note that since the end of World War II average housing prices have not declined nationally. And in last year’s recession, housing prices actually rose faster than the inflation rate. In most housing markets, today’s median-income families can afford to buy the median-priced home. Even with rising home prices, incomes have gone up and mortgage rates have gone down. Of course, that doesn’t apply to a few areas – particularly in east and west coast markets -- where home prices have experienced dramatic increases. Other factors contributing to the strong real estate market include the expansion of the tax-free treatment of capital gains on home sales and the recent declines on Wall Street that have further spurred the demand for housing and investment real estate, it was noted in a report from NAHB. “The stock market was the best game in town for a good while, but it hasn’t been for the past two years. For the time being, investors have decided that housing is probably going to be a better investment than stocks or bonds or gold,” said Maury Harris, chief economist of UBS Warburg. In a survey conducted by Gallup, 59 percent of respondents said they thought an investment in real estate was more attractive than six months earlier. “Demographics are central to what has been going on,” Seiders said. ”We have seen persistent demand coming from population and household growth, including a strong immigration component. We got through the recession in very good condition, partly because of a sizable flow of people from rental apartments purchasing single-family homes. “We are slowly coming out of this recession. The recession should have had its most downward effect on home prices. The bottom line is I don’t think it’s a bubble at all. Speculation over the possibility of a housing price bubble has continued largely due to this rationale: If you had a crash in the stock market, you wonder where else can there be a crash.” Seiders believes that the Federal Reserve will probably start increasing its federal funds rate next spring. By that time, long-term mortgage interest rates may be touching 7 percent – about one percentage point higher than they are today. “But these rate adjustments will be occurring in a stronger economic environment with better income and job growth than we’ve been seeing this year.” * * * Today’s historically low mortgage interest rates are great for homebuyers and owners who want to refinance an existing mortgage, but they have a negative impact in other areas. In some areas, particularly where the number of jobs is increasing, those low rates are pulling many rental tenants into homeownership. They find that their monthly payments on a mortgage are less, or very little more, than their rent payments. And, of course, as homeowners they can enjoy other benefits. This is making it tough on owners of multifamily residential buildings and developments where units are rented. And it’s causing a downturn in the number of multifamily building permits. The low mortgage rates (just below 6 percent at this writing) is also causing a weakness in other economic sectors, according to a report from the Meyers Group, a noted research and consulting firm. The low rates create worries among investors, and a continued shift of funds are flowing into bonds as companies revise earnings statements and report weak profits. Also, those rates contribute to the lack of inflationary pressure. Companies are unable to regain much credible pricing power during this moderate recovery period, forcing them to keep payrolls lean while boosting productivity, the report stated. * * * Women comprise one of the most rapidly growing segments of today’s homebuyers. Women now head more households than men, according to a study by Harvard University. About 53 percent of households are headed by women – up from 48 percent in the 1980s, according to the study. Also, the number of women first-time homebuyers has increased by 65 percent since 1985. Single women made up 22 percent of last year’s first-time homebuyers, compared with just 12 percent for single men. Fannie Mae, the nation’s largest buyer of existing home mortgages, predicts that 28 percent – or 31 million homes – will be owned and financed by women by 2010. Lower down payment mortgages have made it easier for single women to purchase homes by themselves. And most lenders have eliminated the previously required ”relationship letters” for unmarried applicants for mortgage loans. This has also stimulated more home sales to women. Women now own about 40 percent of businesses and earn more money than they did two decades ago. It’s no wonder real estate and mortgage brokers and homebuilders are more seriously targeting women in their marketing programs. * * * A couple of good suggestions to mortgage borrowers were recently carried in the Washington Times: If you, like many other homeowners, are planning to refinance your property, it’s a good idea to lock-in an interest rate for at least 60 days in today’s market. It now often takes from one to two months to close a deal. Also, borrowers should compare a lender’s interest rates based on the constant points involved. To determine this number, each point should be considered equal to a quarter of 1 percent change in the interest rate. This is an effective way to identify the lender offering the lowest rate, the report stated. | 
