Real Estate - Is the boom about to bust?

If you’ve been expecting the boom in American home values to fizzle any day now and you’re convinced that double-digit appreciation rates just can’t keep going, you need to push back your bubble-burst timeline. That’s the upshot of quarterly data on 265 major real estate markets compiled by the Office of Federal Housing Enterprise Oversight (OFHEO), which tracks home pricing changes nationwide. From the first quarter of 2004 through the same period this year, the average home in the United States appreciated by a near-record 12.5 percent.

Red Hot
Some local markets were as hot or hotter in the 12-month survey period than at any time in decades. California, already noted for high-cost real estate, saw an average gain per house of 25.4 percent. That’s a stunning jump of close to 2 percent per month, often on homes already priced in the million-dollars-and-up bracket. Three other states–Maryland (21 percent), Florida (21.4 percent) and Hawaii (24.4 percent)–saw home values gain by more than 20 percent on average. A near-record 43 metropolitan areas had average appreciation rates at or above 20 percent, and three–Las Vegas and Reno, Nev., and Palm Bay-Melbourne, Fla.–topped 30 percent. None of the 265 metropolitan areas in the federal study experienced net declines in values and no state had a rate of gain lower than the national Consumer Price Index inflation rate of 3.1 percent during the year.

Cooling Signs
Not all the directional signals were positive. In fact, there are distinct hints that some of the zestiest markets may already be seeing slowdowns. For example, of the top 20 metropolitan high-gainers, not one had an annualized quarterly rate that equaled or exceeded its appreciation rate for the year. To illustrate: California’s price inflation rate during the first quarter of 2005 was 3.8 percent. Annualized–that is, multiplied by four–that comes to a rate of 15.2 percent. That is still frothy, but nowhere as wild as the state’s 25.4 percent rate from the first quarter of 2004 through first quarter 2005. Rhode Island had a 1.91 percent average gain in the first quarter of 2005. Annualized that comes to 7.64 percent. Contrast that with the state’s 17.1 percent average gain for the 12 months covered by the OFHEO study. Similar directional shifts can be seen in dozens of other local areas. A few, in fact, appear to be heading into negative territory. Syracuse, N.Y., for example, posted a 12-month rate of 6.8 percent, but its annualized first-quarter rate was minus 3.5 percent.

OFHEO’s chief economist, Patrick Lawler, sees a “potential for declines in some areas” in the latest survey data, especially where there have been exceptional run-ups. David Seiders, chief economist for the National Association of Home Builders, agrees. In fact, so do most mortgage and real estate economists, whose common refrain was summed up recently by Seiders: “This is not sustainable, not at the levels we’ve been seeing,” he said.

Key Questions
In the condominium market of South Florida, however, developers believe there is still more growth. One-bedroom units that sold for $350,000 in September of 2003 sold for $650,000 in June of this year, a 185 percent increase. In the Midwest and South-Central states in particular, real estate fever is not an issue. Housing values in dozens of local markets in those regions continue to appreciate steadily in the mid to low single digits, much as they have for decades. Buyers in the super-red-hot markets spread along the Atlantic and Pacific coasts, on the other hand, would be foolish not to ask the key questions: Where are we in the cycle here? How many more quarterly reports with 20 percent gains can we really expect? Can local employment and income growth support price rises that steadily squeeze larger numbers of potential buyers out of the game? Questions can be asked, but who really has the answers? Even Federal Reserve chairman Alan Greenspan admitted in June that he did not.

High double-digit gains historically never have continued in any market for years on end. Markets will contract, slow down, deflate, correct and, yes, sometimes lose money for the last buyers who purchase at the top of the market hoping to sell and realize a gain. But if you have no need to sell your home in five to seven years, even buyers at the top of the market are safe.

J. David Washington is, president of Forbes Capital Group Inc. E-mail: jdavid@forbesfg.com. Forbes Capital Group™ Always Committed to You™ www.forbesfg.com (c) 2005.