Boom Not Over, But Buyers See Openings

If you’re waiting for the real estate bubble to burst… don’t. A bevy of housing reports this week offer no proof of a sharp market correction, only evidence that real estate is gently cooling off.

The government’s gauge of housing prices, its quarterly House Price Index, showed an overall annual increase of 12.2 percent as of Thursday. Yet cities such as Boston and San Diego — two of the most expensive and fastest-growing markets on opposite ends of the country — are reporting newfound “buyers’ markets.” Prices increases in Pacific and New England states have cooled considerably, while several Nevada cities (that for many quarters were the nation’s hottest markets) no longer appear among the Top 20.

San Diego real estate prices now just are rising by single digits, says Raphael Bostic of the University of Southern California’s Lusk Center for Real Estate. This reflects that job growth cannot keep up with real estate prices, so prices are bound to drop by some degree. Los Angeles County has also seen a reduction in the rate price appreciation, with homes remaining on the market longer.

But the drama that “bubble” analysis have looked for is missing, Bostic believes, as what we are seeing how is a healthy correction of the market. Many recently released reports bear conflicting data, as well, including a U.S. Commerce Department report showing rising prices and a 13 percent increase in the sales of new homes in October? Are we to believe that, or the National Association of Realtors report that suggests sales fell 2.7 percent and that more homes are on the market than at any time in the last two years?

Results are inconclusive across the board, but prices in once-hot Boston are now on ice even more dramatically than in Southern California. The inventory of homes on the market is about 45 percent greater than average, with high inventory and softening prices indicating that more than just the annual seasonal market downturn is upon us.

“The scary thing for me is that price corrections have already started and we are still near record-low interest rates,” says Bill Wendel, a Boston real estate agent. “I’m asking the obvious question in the room that the industry doesn’t want to ask: ‘What’s going to happen to everyone who bought adjustable-rate- and interest-only mortgages if rates rise to 9%?’”

Boston and San Diego are considered “coastal hyper markets,” though, where the prices are always highest and the real estate swings wildest. At the same time this is going on, real estate markets in the South and the Midwest have been more or less flat.

The Psychological Factor

Regardless of where you live, analysts agree that the “psychological factor” has been driven out of the market in recent months. With it have gone the speculators.

“I think the biggest change has been a change in sort of the broad perception of the market, of it being truly an out-of-control sellers’ market, to an increasing perspective that the market has become, for lack of another word, more rational, more grounded in fundamentals, ” said Todd Sinai, Associate Professor of real estate at the Wharton School at the University of Pennsylvania.

Sinai rails against “bubble” theorists as “Chicken Littles” in an article published September 19 in the Wall Street Journal. While acknowledging “rampant growth” in real estate, he and co-author Chris Meyer looked at the annual cost of owning a house – one’s mortgage payments, fees, maintenance, etc., minus benefits like interest deductions and depreciation. Sinai’s research suggests that when you ignore the huge price tags and concentrate on those annual costs, then prices have stayed pretty reasonable in all but the most expensive (Boston, San Diego, Miami real estate) markets.

In conclusion, he predicts real estate will not collapse because, beneath the hype and excess, prices are largely a rational response to economic forces. Fundamentals like job expansion and loss, immigration and family growth, and a lack and/or abundance of homes for sale in places where people want them — these are the things that will set the pace.

Locally, at least right now, prices appear to be driven less by speculation than by solid demand, which is a healthy sign if you are looking into the Florida home loan possibilities.