Is housing boom destined for Nasdaq-like free fall?
By Rachel Beck
Associated Press
NEW YORK — Just about anyone who owns a home or wants to buy one has this on their mind right now: Is the housing boom about to go bust?
The supercharged housing market can't keep up its breakneck pace forever. There's bound to be some slowdown in the appreciation of home values, especially in parts of the country that have seen massive building and big price gains.
But don't expect a Nasdaq-like free fall in home prices anytime soon. Chances are you won't wake up one morning and find your house is virtually worthless.
"Homes have been and remain a very good investment right now, and I don't see that changing anytime soon," said Celia Chen, director of housing economics at Economy.com.
The strong housing market has been the silver lining of many Americans' investment portfolios after two years of stunning declines on Wall Street. While investors watch their stock holdings tumble, the value of their homes keeps soaring. The average price of a single-family home rose 10 percent from 1999 to 2001, and as of July, the average price was up 9.2 percent compared with last year, according to the National Association of Realtors.
And all this has happened despite the tough economic climate. There have been massive layoffs nationwide and new threats of terrorist attacks, but people have kept buying homes at a record pace.
The housing sector has been so strong that it helped temper the effect of last year's recession and now is helping to prop up the economy as it struggles to recover.
Much of the home-buying boom is attributed to the steep decline in mortgage rates, which fell last week to a 32-year low of 6.05 percent, according to mortgage company Freddie Mac. That means you can spend more on a house and make lower monthly payments.
Also contributing is the continued rise in Americans' incomes, which gives them more money to spend on housing, and the significant tax benefits that come from home ownership. Mortgage interest is tax deductible and those who sell their homes can walk away with up to $500,000 tax-free.
While the dramatic run-up in prices has been good for the economy, it has also fueled much speculation over whether the housing market is a bubble about to burst.
Dancing around in homeowners' minds: Will prices soon crash like technology stocks?
Market bubbles usually involve rapid price gains fueled by unrealistic expectations. They burst when those expectations are ultimately proven to be unfounded.
The good news is that most economists, including Federal Reserve Chairman Alan Greenspan, and many housing-sector analysts don't even think there is a bubble. They claim that underlying economic fundamentals for the national housing market remain strong.
There still is a lean supply of houses for sale, and construction of new homes hasn't spun out of control, as it did during previous housing booms that went bust, especially in the early 1990s. At the same time, sales of new and existing homes continue to rise at a record-setting pace. Baby boomers and new immigrants are fueling the boom, buying up first-time homes, bigger digs and places to retire.
Together, these factors indicate that supply hasn't exceeded demand, a good sign for those hoping to avoid a bubble.
"There is no grounds to even talk about a bubble because we don't have an inventory situation that needs to be fixed and there still is strong buying demand," said Dave Seiders, chief economist at the National Association of Home Builders.
And even if there is a bubble, that doesn't mean it will burst.
Home prices have never declined nationally from one year to the next since the NAR started keeping track in 1968.
There are already signs of a healthy pullback. Housing construction has softened over the last three months, and price gains have started to slow a bit. More cooling off is expected in the coming year, especially if mortgage rates start to rise again.
That's not to say that there won't be more pronounced declines in regions of the country like San Jose, Calif., and Austin, Texas, which were overbuilt during the last decade and have experienced sharp price gains. The nation's most expensive homes are also poised to come down in value after shooting up so dramatically over the last few years. No one thinks the housing market can keep up its fast-growing pace.
Now the real question is whether it comes in for a soft landing or goes into a free fall like the one that hit the stock market. If history is right, homeowners will still walk away profitable.
