Housing Still Hasn’t Hit the Ceiling

In this world of corporate scandals, the term “good investment” seems an oxymoron. The tumble of many “blue-chip, grade-A” broker-recommended wonders has made investors anxious, fearful that the last decade’s prosperity was not built on actual productivity but on a bubble inflated by accounting legerdemain and corporate greed.

Is housing the next bubble to deflate?

Certainly the last decade’s housing statistics mirror those of the Wall Street wonder stocks. The total of new and existing home sales in 2002 will approach 6 million units. (As recently as 1996, home sales had never topped 5 million units.)

As for prices, in spite of the conventional logic that price increases must correlate with income growth, home-price appreciation outpaced income growth. For each of the last seven years, home-price appreciation exceeded inflation.

What investor or buyer would not wonder whether this sector too will plunge?

We only need look back to 17th century Holland when there was a run on tulip bulbs, driving up the price to the point where people sold their homes to afford a single tulip bulb -- operating on the premise that there would be someone else who would buy it for even more.

Today’s anxious owners, and would-be buyers, fear that housing might become America’s own “tulip mania,” where the passionate bidding up leaves some people wealthy but many more holding real estate of minimal value.

Pundits pull out the truisms: Escalation cannot continue, what goes up must come down, housing cannot soar out of sync with incomes, the frenzy for bigger, more luxurious McMansions has gotten ludicrous.

The concern is not new. In 1989, a front page article in Barron’s quoted a study that predicted housing prices could fall as much as 3% a year over the 1990s.

After prices rose again in the latter half of the 1990s, last summer Forbes asked, “What if Housing Crashed?” noting “ominous signs.”

Experts predicted that after Sept. 11, the housing bubble would surely burst; but people delayed, not aborted, their purchases, which reached an all-time high in 2001.

Bubbles, of course, do burst; but housing is not a bubble akin to tulips or to Enron or other corporate scandals. It is a concrete product -- a place where people live.

And as anybody who has sold or bought a house can attest, it is not an easily fungible commodity. The transaction costs of selling and buying are high, in terms of money, time and effort.

Most critically, though, the demand for housing will remain strong so long as the supply is insufficient to meet that demand.

Today, immigration has made the demand-supply imbalance especially acute as more newly formed households seek homes.

But even if we curtailed immigration, household growth will continue to be robust.

In California in the 1990s, for instance, more than four jobs were created for every new housing unit. In the Bay Area, the ratio was 16 to 1.

Demand for home ownership remains high, thanks to a confluence of economic factors:

* Low interest rates make home ownership increasingly affordable, as well as rational. Renters, seeing the advantage of owning, struggle to sign on the dotted line of a mortgage as soon as they can muster a down payment.

* The amount of money needed for a down payment has plummeted thanks to a plethora of mortgage products.

Last year, 15% of all buyers put 5% or less down on their homes, compared with only 4% of all buyers in 1990.

* Government programs for first-time buyers have encouraged low-income Americans to buy.

* Finally, housing has emerged as an alternative to a volatile stock market. People fear that if they invest in Wall Street, their money may evaporate. But they know that they can live in, and enjoy, their equity if they renovate their home or buy a vacation home. Increasingly, as the stock market has wavered, homeowners have used their homes as ATM machines, drawing out the accumulated equity via home equity loans or refinancing.

Yet not even the most upbeat housing analyst expects the current price escalation to continue: Prices cannot remain wildly out of sync with incomes.

Price appreciation has flattened, with selected markets seeing small decreases in value. Over time, home price appreciation cannot outpace income growth.

Recessionary trends, as well as rising unemployment, weakens the demand for home ownership.

The recent implosion of the manufactured housing industry, as well as escalating vacancy rates in luxury rental apartments, point to people’s growing caution.

And any seismic economic change (for example, interest rates rising to 9% or soaring unemployment) reverberates in the housing sector.

But for the two-thirds of American families who own homes, it is still a time of rational exuberance.