Volume 6 Issue 10 November 2005
BURSTING THE BUBBLE THEORY
DWM Readers Say Housing Bubble Won't Burst
by Tara Taffera
Anyone who picks up any number of publications, whether it be the New York Times, Wall Street Journal, Money, etc., will see an abundance of articles in which economists debate whether or not the housing market bubble is set to burst. In other words, is a drastic reduction in home prices, and a decrease in new home construction something that will happen in the next few years? This was the main question DWM posed to its readers to find out what the fenestration industry believes regarding this issue. The results of that survey, which appear on the following pages, may surprise you. On page 36, you’ll also find an article detailing the views of one leading economist on this, and other housing issues.
Up, Up and Away
But, first, let’s take a look at what one survey respondent said regarding the rising cost of homes. Viggo C. Bertelsen Jr., president of Deering Glass Inc. says this issue will continue to be driven by land availability and use restrictions, and the flight from urban to suburban environments, increased energy costs, etc.
“The rise in new home cost to the consumer will increase demand for existing homes available at lower prices because of age, location, features, etc. Available capital will be spent to improve these older homes when the owners can pay for or finance the improvements one at a time and as improvements make sense technically and economically. People can live without the latest whiz-bang features in their home if they can’t afford them! There are a lot more older homes available to be improved than there will be new homes to be purchased from year-to-year, even with continued new home production levels. New home sales will continue to follow population growth with younger, less affluent consumers buying the older homes from those moving up or on. Home-buying consumers will, however, likely make more serious trade-off analysis and decisions on buying a new or used home driven by money available, mortgage costs, taxes, location vis-à-vis work location, etc. rather than respond to the hype of “having a fancy brand new home.”
Another survey respondent agreed saying, “Homeowners won’t be able to buy as big of a house as they desire.”
A Regional Phenomenon
In fact, our readers agree with Kermit Baker of the Joint Center for Housing Studies who says house prices escalating rapidly is really more of a regional phenomenon (see article, page 36).
“Other than a handful of markets, prices have not escalated dramatically,” says one of our survey respondents. “The issue is localized to certain areas.”
Gregg Proscia, senior vice president for Silver Line Windows, based in North Brunswick, N.J., says, “Yes, in areas like New Jersey and Washington, D.C., you wonder how people afford houses. But to use this as a gauge for the whole country is wrong.” He points to prices in booming areas such as Las Vegas, North and South Carolina and Phoenix, that are not at all like the high prices being seen in areas such as the Northeast.
Proscia puts the state of the housing market simply. “I still think young couples are better off buying than renting … While there may have been a slight softening, I don’t think the bubble will burst.”
On the remodeling side, Proscia says he hopes that the recent passage of the energy bill which offers a $200 tax credit to consumers, (see DWM, September 2005, page 24), will prompt homeowners to upgrade their windows to energy-efficient models. Homeowners may find the energy-efficient models an attractive alternative particularly in the wake of natural gas prices that are predicted to go up, thus increasing home heating bills.
“We’re hoping that the fear of rising fuel costs will spur a boom in replacement and cause homeowners to consider energy-efficient products.”
Making Sense of It All
One respondent believed emphatically that the bubble would not burst saying, “housing prices don’t drop like stock prices.”
So while many people in all types of industries, may wonder how to afford housing, especially those in certain areas, one reader put it in perspective. “My parents used to worry about the same thing. How will future generations afford homes?” That is a question that will likely continue to be asked for generations to come.
So, while the majority of respondents don’t see the bubble bursting in the housing market anytime soon, the fact that 40 percent of respondents do believe this is a possibility, shows there is still cause for concern. Add to that the fact that economic pundits write about this bubble theory daily, show there could still be a cause for concern. Prices might not come crashing down, but even if this happened in some areas it would have a significant effect on the market.
If you would like to share your thoughts on this issue, e-mail firstname.lastname@example.org or call 540/720-5584 x 113.
It's Just Froth, Not a Bubble Ready to Burst
Creative financing options have become more prevalent. Long-term housing projections are favorable. The remodeling market is strong. Finally, the housing bubble is just a regional phenomenon. These were just some of the messages that Kermit Baker, senior research fellow at the Joint Center for Housing Studies (JCHS), stressed when he spoke before members of the Window and Door Manufacturers Association at its recent summer meeting.
DWM has devoted much coverage in this issue to a possible bubble burst in the housing market, and Baker talked about this possibility as well. But he believes this is a regional trend and not a nationwide problem. He did point out that there are uneven housing price gains in several key metro areas that are grossly above the national average (see figure 1).
“We have seen very uneven increases,” says Baker, who adds that these areas include the California and Florida coasts and the Northeast corridor.
Increases in these areas have forced households to live at a greater distances (20 miles or more) from central cities, says Baker.
Is trouble brewing? In some places, yes, says Baker. “But the numbers we’ve been seeing can’t be sustained,” he adds.
Due to these price increases, some families are being forced to buy smaller homes. Others are employing creative financing options such as adjustable rates and interest-only mortgages.
“This should cause great concern,” says Baker. “It puts homebuyers at risk should there be a change in housing fundamentals.”
While housing prices are on the rise, especially in some key cities, Baker still doesn’t forecast a nationwide bubble burst.
“When we talk about a housing price bubble, the point seems to be lost that this is a regional phenomenon,” he says. “Chairman Greenspan is the only one that understands this—he calls it housing froth. Hopefully he’ll be successful in changing this debate.”
Housing Stats/ Remodeling Market
Baker gave attendees an overall picture of the housing market and says that long-term housing projections are favorable (see figure 2). According to projections, there will be an additional 13.4 million new households in the next year. “Actually this is a conservative number,” says Baker. “It may be more like 14-14.5 million,” he says.
He adds that all minority groups are an increased source of housing demand, but “despite progress, minority homeownership rates still lag.”
Hispanics don’t just account for the growth of new homes but, “Hispanics are leading the surge in total improvement expenditures,” says Baker. He quickly adds though that baby boomers still dominate the remodeling market.
But, all households seem to be making major improvements. Baker says $275 billion dollars was spent in remodeling spending in 2005—75 percent by homeowners and 25 percent by rental owners.
“A lot of stories talk about new construction but remodeling is strong,” he says. “Almost 30 million homes were upgraded significantly over the past decade.”
Baker points out that in 10 percent of homes almost nothing was spent, but when these families move out, new families will move in and may make dramatic improvements over a short period of time.
“A lot of these projects happen at turnover which is why we watch this so closely,” he says.
Tara Taffera is the editor/publisher of DWM magazine.
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