Through The Roof
With home prices at record highs, some experts say it may be time to pull back
After watching prices on the houses he was selling jump by an average of $3,000 a month most of last year, Mike Larson, president of the oldest real-estate agency in Tacoma, Wash., decided to try for some of the easy money himself. In October, he and his wife bought a duplex, which they planned to rent out while the value kept growing.
The money hasn't turned out to be so easy. The two units sat empty for three months, until Larson dropped the rent $50 to $675 a month and cut the lease to six months. He has kept busy selling houses in Tacoma, thanks to clever, new low-cost mortgages that enable people to buy nice homes for less than $1,000 a month. He now has a firsthand look at one of the aftershocks of steep price hikes: Sales to investors like himself have increased the supply of rental units, while a building boom has been luring away potential renters. "There are new houses going up all over the place," says Larson. "It is crazy."
Crazy, indeed. None other than the usually hypercautious chairman of the Federal Reserve, Alan Greenspan, has confirmed the irrational exuberance of the real-estate market. In late May, he uttered the dreaded "B" word: While he didn't think there was a national real-estate bubble, "It's hard not to see that there are a lot of local bubbles." And last week's news only heightened the debate over the froth, as the National Association of Realtors reported that existing homes sold at a record annual pace of 7.2 million in April. What's more, the median selling price across the nation was up more than 15 percent over last year to $206,000. And the supply of homes for sale hovered near an all-time low of just four months' worth. Sales of new homes also set a record in April.
Overpriced. Home builders say these numbers show that strong pent-up demand is fueling the price gains. And even the most bearish economists agree that in about half of communities nationwide, prices are still affordable and rising only moderately, which will most likely allow those residents to safely weather a downturn. In addition, many economists note, several previous big run-ups in price have been followed not by collapses but by price stagnation. What's more, nobody can predict when price inflation will pause, let alone whether prices will, if ever, fall.
Still, in many of the 54 percent of communities that economists now deem overpriced, such as Tacoma, Las Vegas, Denver, Miami, and New York, there are worrying signs of a bubble, says Mark Zandi, chief economist for Economy.com . "It is nuts. It is beyond nuts."
The single most worrisome sign, Zandi says, is a construction boom that is starting to outpace demand. America creates only about 1.2 million additional families or individuals who need new housing each year. About 400,000 houses have to be replaced because of obsolescence each year. Add in, say, 300,000 more for second or vacation homes, and the total annual demand for additional housing tops out at about 1.9 million. But builders and manufacturers are on track to create at least 2.2 million new housing units this year. "For a better part of a year, supply has been outpacing demand significantly. That will become a real problem in the next few years," says Zandi.