REAL ESTATES FORUM

Why the housing bubble hasnt burstFactors that have kept housing prices
rising are worth watching for signs of weakening.
January 19, 2005: 10:33 AM EST
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - No ones really sure if the nations housing market
is a bubble at risk of bursting, or fairly priced with more upside ahead.

But analysts generally agree that low mortgage rates and other factors have
boosted the market over the last five years, through a recession, job losses
and the Sept. 11 attacks.

Still, some cracks are starting to show.

Reports on housing starts and new home sales, both considered leading
indicators of the housing market, posted much sharper-than-expected declines
in November, although December starts rebounded smartly. And the November
report, the most recent available, showed median new home prices showing a
slim but rare year-over-year decline.

So are home prices set for a tumble? Here are three major areas to watch for
warning signs of trouble ahead.

Low mortgage rates
A key factor supporting the real estate prices are continued low mortgage
rates. Even economists who have warned of a housing bubble for several years
say low interest rates have helped the housing market stave off problems.

The Freddie Mac survey of 30-year mortgage rates was at 5.74 percent in the
most recent survey, which, while up from the 5.23 percent low seen in June
2003, is still comfortably below the 6 percent level considered to be low by
most economists.

The biggest surprise to me has been that interest rates have stayed as low
as they have as long as they have, said Dean Baker, co-director of the
Center for Economic Policy Research.

Baker said his projections are that rates will rise by about 1 percentage
point this year, which he warned would be enough to raise borrowing costs
and start driving home prices lower on a national basis, as buyers can no
longer use the cheap financing to buy more expensive homes.

But other economists who arent as worried about a bubble argue itd take a
sharper increase in rates, up to 7.25 or even 7.5 percent, before it starts
to cut into home sales. And they say even rates that high would cut the pace
of price increases for homes, rather than send housing values lower.

Doug Duncan, chief economist for the Mortgage Bankers Association says that
even in 1983, when interest rates rose by 2 percentage points and the number
of home sales plunged, median housing prices increased, albeit by less than
the rate of inflation.

Weve had only two or three quarters since World War II when national
average house price fell, and its never happened for a full year, said
Duncan. Thats not to say that it cant happen. But weve been through some
quite wide swings economically during that time.

More people buying
Duncan says that the reason he has the most faith in todays home prices is
that demographics and sales results suggest continued strong demand for
housing.

The leading edge of the Baby Boomers is now 59 years old and thats only
the leading edge. Our figures show that we dont see peak home ownership
until age groups reach their 60s, he said. Theyre not done buying
housing.

Duncan points out that the supply of homes on the market is still near
historically low levels -- a bit over four months, down from nearly five
months only a year ago.

But Wachovia Securities Chief Economist John Silvia says that some of the
demand for second homes could be most at risk if housing prices do start to
show weakness, with resort areas near the coasts being most at risk if there
is a reversal in the housing market.

You have the Baby Boomers having the resources to buy condominiums, betting
on the increase in value in the next six months, said Silvia. That
activity may be the first to feel the crunch if the housing bubble bursts.

Shock to the system
Silvia said the greatest risk is that despite various challenges for the
economy as a whole, the housing market has never really been tested.

The market has not seen a negative sharp change in fundamentals, said
Silvia. You havent seen a sharp rise in interest rates or a signal that
the money isnt there to keep lifting prices.

Silvia said one of the most serious threats to the housing market could be a
sharp drop in the dollars value, rather than the slow steady decline seen
for the last couple of years.

That fall could dry up foreign investment in U.S. markets, including the
secondary mortgage markets, and cause a sharp rise in interest rates coupled
with a sharp increase in inflation.

But Silvia says that short of that kind of shock, he doesnt believe the
housing market is a bubble ready to burst, at least on a national scale.

Home buyers need something visible on-screen to surprise them, said
Silvia. If its the dollar gradually losing another 10 percent or mortgage
rates creeping up 1 percentage point, thats not going to do it.

Baker disagrees, saying that the strength of the housing market in recent
years has left it in uncharted territory, similar to the stock market
valuations in early 2000 just before that market bubble burst.

Normally when you talk about housing bubbles bursting, youre talking about
a specific local market, said Baker. But weve never had a nationwide
run-up in home prices like this. I dont think its realistic to think the
decline wont also be national. I think a 15 percent nationwide decline is
very plausible. In many bubble areas, could be looking at 20-25, maybe 30
percent declines.







Find this article at:
http://money.cnn.com/2005/01/18/news/economy/housing bubble/index.htm


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