By Sue Kirchhoff, USA TODAY
WASHINGTON — Pamela Harness has never seen the market this
hot.
The Phoenix-area real estate agent's clients include a
couple who made a $150,000 profit by reselling a house they held for just six
months, an investor who paid more than $300,000 for a home he plans to put back
on the market by year's end, and buyers facing months-long waiting lists at area
home builders — if they can even get on a list. (Related graphic: Housing prices increase across the USA)
"The market here is just absolutely nuts," says Harness at
West USA Realty in Chandler, Ariz. "I get investors calling; they want to buy a
home. I tell them they're a day late and a dollar short at this point."
This was supposed to be the year the housing sector, which
has expanded at a record-setting pace since 1998 (except in 2000), started to
cool. Instead, existing-home prices rose in March at the fastest pace in two
decades, and new-home sales hit another peak in the first three months of the
year.
The strong housing sector has buoyed the economy and local
governments, through construction payrolls, increased property tax revenue and
consumer spending tied to high home equity.
But it also has economic downsides. High prices are keeping
buyers out of the market, making it harder for firms to attract workers in
pricey markets and breeding high consumer debt and speculative buying.
Many economists warn a major swath of the market is at risk
of a price correction.
"Home buyers appear to be irrationally exuberant," Jan
Hatzius, economist at Goldman Sachs, said in an April report to clients,
recalling Federal Reserve Chairman Alan Greenspan's comment about stock market
investors in the 1990s. Hatzius identified frenzied coastal markets, such as Los
Angeles, New York, Boston, Washington, Miami and San Francisco, as especially
hot.
Prices double in California
Nationally, home prices have jumped an average 50% in the
past five years, doubling in California and rising about 80% in Nevada and
Hawaii, according to the Office of Federal Housing Enterprise Oversight (OFHEO).
In an April USA TODAY poll of 55 top economists,
three-fourths called housing overheated, though they differed on whether they
expect a gradual cool-down or a sharp drop in sales and prices. Forecasts for a
soft landing expect robust job creation to offset the negative effects of the
Federal Reserve's interest-rate increases.
Those forecasts were buoyed Friday, when the government's
April jobs report showed stronger-than-expected job creation. But other recent
data show a somewhat softer economy than forecast, with wages lagging behind
inflation.
A few economists warn of a national housing bubble, but
most say local housing and job markets vary so much that a countrywide downturn
is unlikely. But price reductions in big urban markets could have a broad effect
on the economy. That is why there is plenty of concern about signs of
speculative buying: the fact that prices are rising faster than rents, when the
two usually move more closely in tandem, and price inflation that can't be
justified by low rates or supply.
For their part, industry officials are irritated by "sky is
falling" predictions. Home builders say the current, elevated level of about 2
million housing starts a year is not enough to meet higher-than-predicted
household growth, fueled by immigration. Supply is tight in some areas because
it can now take years to get developments approved by zoning authorities.
Further, affluent baby boomers, rather than selling homes
as they near retirement, are buying second houses. Investment homes were nearly
a quarter of all purchases in 2004, and vacation homes were an additional 13%,
says the National Association of Realtors (NAR).
Joel Rassman, chief financial officer of luxury home
builder Toll Bros., a publicly traded firm based in Pennsylvania, reviews the
finances of recent customers every few months to gauge how well the company
could weather altered economic conditions, such as an interest-rate surge. At
last check, his average buyer could pay at least 38% more.
"I still have so many people overqualified, I should be
able to sell houses as long as I've got housing in the right location," Rassman
says.
Nationally, an NAR survey shows affordability still in a
healthy range. But in a number of cities, soaring prices are pushing not just
lower-income workers but middle-class families to the sidelines.
In California, on average, only 18% of the population could
afford a median-priced home in March, according to the California Association of
Realtors.
That's down 3 percentage points from a year ago. The
minimum household income needed for a median-priced home, at $495,400, was
$115,910 based on a 5.81% interest rate and 20% down.
In Montgomery County, Md., a suburb of Washington,
officials say people making the county median income of $84,446 could still
afford median-priced existing town houses and condos but won't be able to in a
couple of years if current trends continue. New town houses and existing homes
are out of reach.
In Minneapolis, where appreciation is more modest, the
non-profit Family Housing Fund says lower-paid employees such as cashiers and
child care workers can't afford a typical $189,000 home.
At the International Brotherhood of Electrical Workers
Local 1245 in Walnut Creek, Calif., about 30 miles northeast of San Francisco,
housing is on the agenda in coming contract talks. Union officials will press
for higher pay in cities with stratospheric prices, such as San Francisco. The
plan is controversial with union members who have opposed wage differences based
on geography, gender or other factors.
IBEW Communications Director Eric Wolfe says there is no
choice because high prices are distorting the local economy. Fewer workers want
jobs in expensive cities. Experienced workers with seniority rights are claiming
openings in cheaper rural locations. Mass migration from pricey areas to
affordable ones, dubbed the "salmon run," creates its own problems.
"Like the plague in the Middle Ages, real-estate-price
inflation is being spread by the people who are fleeing it," Wolfe wrote
recently about the bargaining stance
Full Article: http://www.usatoday.com/money/perfi/housing/2005-05-10-housing-cover_x.htm
