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Is There a Housing Bubble? |
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You’ve read about it in the newspapers… is there a housing bubble and when will it burst? Find out from the nation’s home builders what’s really going on with new home construction, prices and more to help you make sound decisions when it comes to your family’s home…and financial future. Access information from our chief economist; read commentary on the housing bubble talk; and view data on how housing performs short and long-term.
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ARE HOME PRICE “BOOMS” ALWAYS FOLLOWED BY “BUSTS”?
No. And, home prices nationally have never declined.
According to a study released in May 2005 by the Federal Deposit Insurance Corporation (FDIC), most local market price booms in the past were followed by periods of price appreciation slowdowns that allowed other economic factors – including household income and housing supply – to catch up.
Further, the limited number of FDIC-documented price "busts" occurred in markets where the local economy was under considerable stress and job losses were heavy, such as in the mid-1980s in Houston and other oil patch markets when oil prices collapsed.
Virtually all local economies are now moving ahead, and the national economy’s forward momentum is likely to continue for years.
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ARE INVESTORS CAUSING HOME PRICES TO RISE?
NAHB is watching this carefully.
NAHB research has uncovered a good bit of concern in the home building industry about speculative home buying, i.e., purchases driven solely by the lure of short-term profit. Our research also found that many builders, particularly large companies, are taking steps to discourage sales to buyers who do not intend to live in the homes and that these efforts have helped contain speculative activity in the national new-home market.
Builders are concerned about speculative home buying because a high level of this activity can generate substantial "hidden supply" that could come back onto the market suddenly if prices stop rising quickly. In that event, home prices would be adversely affected. Indeed, speculators could not only unload units that they own, they also could fail to close on units they have contracted to buy — a key risk in the new-home market because of typically long lags between sales contract signing and closing.
Many builders also are concerned about investor-owned units standing empty in new communities they are developing. Large numbers of sold but vacant units can detract from the sense of community as well as the overall look and feel of an area under development.
From a national perspective, the amount of speculative buying in the market for new single-family homes appears to be quite limited at this time, thanks largely to the efforts of large national and regional builders and those companies in hot metro markets that recognize the dangers of speculative activity.
A comprehensive national survey of about 500 home builders conducted by NAHB in June of 2005 shows that only 4 percent of single-family homes sold in the first half of this year were to investors (not for primary residence or vacation home), compared with 13 percent of multifamily condo units sold during the same period.
Some of the units sold to investors (particularly condos) are bought as long-term rental investments, of course, leaving even smaller shares for short-term speculative activity. It’s also noteworthy that only 6 percent of builders who responded to NAHB’s June survey said they were actively marketing homes (single-family or condo) to investors.
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HOW HAS HOUSING LED THE U.S. ECONOMY?
Housing has led the nation’s economic expansion for more than three years. The industry recorded back-to-back, record-breaking performances for new single-family housing construction and home sales in 2003 and 2004, and is on pace to set new records in 2005.
The production of housing and the value of housing services produced by the housing stock account for more than 16 percent of the nation’s Gross Domestic Product.
The most recent national statistics show that the fundamentals of the housing market are sound. New homes and apartment units are being started at an annual rate of about 1.9 million. Combined with about 140,000 manufactured homes, that’s roughly the level required to meet the underlying demand for new housing.
Sales of both new and existing homes are running at a healthy pace in virtually every region of the country. Unsold inventories of new homes are low. And rates on 30-year, fixed-rate mortgages are still well below 6 percent, a huge advantage for buyers.
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IS BUYING A HOME A GOOD INVESTMENT?
Yes.
Owning a home provides more than shelter and a stable place to raise a family. For the majority of American households, home ownership is the steppingstone to a future of financial security.
In the past five years, the market value of homes owned by U.S. households has soared from $11.5 trillion to stand at over $17 trillion. Further, housing equity – the value of a home minus any mortgage debt — increased by almost the same proportion — from $7.1 trillion to $10.6 trillion — over this timeframe.
Home equity accounts for more than half of the total net wealth of the typical home owning family, making home ownership the primary source of a household’s net worth and the fundamental first step toward accumulating personal wealth.
For most people, a home provides not only a place to live, but also serves as a sound investment, producing a solid rate of return with a low risk of loss. Since 1980, home prices nationally have increased at an average rate of about 5 percent annually and have never shown an annual loss. Although stock values increased at a higher rate, they were much more volatile, and the stock markets posted three consecutive years of decline (2001-2003) recently. Moreover, a home is an investment in the future, a product that will provide services for many years.
Home ownership and its Benefits
One of the major benefits of home ownership becomes evident every April, when homeowners realize significant rewards as they calculate federal, state and local taxes.
Homeowners will begin to gain significant financial benefits as soon as they purchase a home, especially when it comes to calculating taxes. If you itemize deductions on your tax return, usually you can deduct the mortgage interest on a primary residence, interest on a home equity loan, points and real estate taxes. Check with a tax advisor for details regarding your specific loan.
The nation’s home ownership rate has increased dramatically during the past 50 years. From about 44 percent at the end of World War II, it has grown to a record 69 percent. Further, home ownership strengthens the social fabric of the nation. It encourages civic participation and involvement in schools and other community organizations and inspires the upkeep and improvement of the home, the neighborhood and the community as a whole.
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JUST HOW BIG IS HOUSING?
The U.S. housing market consists of 107 million occupied units, including 74 million owner-occupied homes and 33 million rental units.
The total value of the nation’s housing stock exceeds $17 trillion. And, equity – the value of a home minus any debt – now exceeds $10 trillion in the U.S.
More than 69% of all U.S. households own their home – the highest home ownership rate in history.
In 2005, more than 7 million single-family homes will be sold, including nearly 6 million sales in the existing housing market and about 1.2 million in the new housing market.
Housing is first and foremost a place to live, and although significant, its value as an investment is still secondary for the vast majority of American homeowners.
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WHAT WILL INTEREST RATES DO?
Short-term interest rates have gone up by 2.25 percentage points since mid-2004 to a federal funds rate of 3.25 percent. Despite the systematic increases in short-term rates, long-term interest rates actually have fallen over the past year—this is what affects your home mortgage interest rates, which continue to remain extremely low.
The question is, will the Fed continue to raise the short-term rates and what impact will that have on mortgage rates?
As of June 30, 2005, NAHB economists forecast that long-term rates will move up (by about half a percentage point) during the second half of 2005, as the Fed moves the (short-term) federal funds rate to 4 percent. But according to NAHB, that’s conventional economic thinking and the markets may not agree.
Based on NAHB’s forecast, if the long-term rates move up in the next six months by that half of a percentage point, 30-year fixed mortgage rates would average around 5.79 percent, compared with today’s average rate of 5.29 percent.
What that means for a $250,000 loan is that your monthly principal and interest payment would increase by about $79.00. For example:
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30-year fixed at 5.29 percent |
30-year fixed at 5.79 percent |
$1,386 |
$1,465 |
(The average 30-year mortgage rate was taken from Bankrate.com on July 22, 2005. Property taxes and other costs such as insurance may be added to principal and interest to arrive at your final, monthly mortgage payment.)
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WHAT’S THE NATIONAL HOUSING PICTURE?
Housing has led the nation’s economic expansion for more than three years. The industry recorded back-to-back, record-breaking performances for new single-family housing construction and home sales in 2003 and 2004, and is on pace to set new records in 2005.
The production of housing and the value of housing services produced by the housing stock account for more than 16 percent of the nation’s Gross Domestic Product.
The most recent national statistics show that the fundamentals of the housing market are sound. New homes and apartment units are being started at an annual rate of about 1.9 million. Combined with about 140,000 manufactured homes, that’s roughly the level required to meet the underlying demand for new housing. Sales of both new and existing homes are running at a healthy pace in virtually every region of the country. Unsold inventories of new homes are lean. And rates on 30-year, fixed-rate mortgages are still well below 6 percent.
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WHERE ARE TODAY’S SIZZLING HOUSING MARKETS?
The super-hot housing markets reporting appreciation rates of more than 20 percent are concentrated in the fast growing markets of California, Florida, Nevada, Arizona and the Northeast Corridor. Out of the markets reporting appreciation increases of more than 20 percent from the first quarter of 2004 to the first quarter of 2005, 25 were located in California, 12 were in Florida, five were in the Washington-Maryland-Virginia area, and Nevada and Arizona had three each.
However, according to the Office of Federal Housing Enterprise Oversight (OFHEO), well over half of the more than 375 metropolitan markets around the country experienced housing appreciation rates under 10 percent from the first quarter of 2004 through the first quarter of 2005.
Remember, speculation about a housing bubble is not really relevant to the vast majority of the nation’s 74 million home-owning households, because their markets are not experiencing super-hot appreciation rates.
Visit the Table Showing Housing Appreciation Rates.
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WHY ARE ALL HOUSING MARKETS LOCAL?
All markets march to the beat of their own drummer as determined by a unique mix of demand and supply issues.
Housing appreciation rates will vary significantly from one market to the next -- and even within a single market – depending on demand, supply constraints, topography, consumer preferences and other factors.
Because of the unique local nature of individual housing markets, the possibility that there will be any nationwide decline in home values is very remote, a point that Federal Reserve Board Chairman Alan Greenspan, the nation’s chief monetary policy maker, has repeatedly made in recent months when questioned about whether there is a housing bubble.
Consumers could see a few super-hot markets cool in the near future, with values leveling off or even declining a bit. But even in markets where home prices might stabilize or decline somewhat, the vast majority of homeowners will escape unfazed because values increase over time, and most homeowners are in the market for the long term – not a short-term gain. |
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