Speculative "housing bubble" hovers over ToledoWritten by Michael Brooks | | email@example.com
Home equity is one of the biggest components of overall wealth for the average American family.
Housing prices have been rising in many markets around the country; the average home cost rose 12.5 percent from the first quarter of 2004 through the first quarter of 2005, according to the Office of Federal Housing Enterprise Oversight (OFHEO).
The average home has risen more than 50 percent in value during the past five years.
In Nevada, house prices have risen 31.2 percent in the past year, while homes in California and the Washington, D.C. area have, on average, doubled in value in the past five years.
This good news for homeowners, however, has many experts nervous about the future.
Financial figures as notable as investment guru Warren Buffet and Fed Chairman Alan Greenspan have publicly fretted about the possibility of a speculative bubble in the housing markets.
Greenspan recently warned that ”speculative fervor” has driven the prices of homes in some markets to ”unsustainable levels.”
This May, five government agencies, including the Fed, issued a joint statement expressing concern over some lending practices. Among the items being scrutinized are so-called ”no-doc” or ”low doc” loans (mortgages with little or no documentation on a borrower’s assets, income, and debts) and firms with higher loan-to-value (LTV) and debt-to-income (DTI) ratios.
Local investment advisor Dock Treece, of Treece Financial Services, weighed in on the debate.
”There is definitely a bubble of some kind in places like California and the East Coast,” he said. ”There will likely be some sort of correction, but it is anyone’s guess as to its severity.”
Treece said the reaction by the Fed will be critical to the effects of any popping of housing bubbles.
”How the Fed responds is the key,” he said. ”If they create massive amounts of liquidity by manipulating the money supply, there will not be a major correction. This is how Alan Greenspan softened the blow from the NASDAQ tech bubble in the late 1990s.”
One source of housing market unpredictability in the short term, according to Treece, is the possible retirement of Greenspan, who turns 80 next year.
”We don’t know what the policies of Greenspan’s successor will be,” he said. ”If the new Fed Chairman has different philosophies, no one can predict what will happen.”
Local housing market
Tim Schlachter, of local developer Buckeye Specialty Homes, expressed confidence in the housing market in Northwest Ohio and Southeast Michigan.
”I don’t see that speculation has had much impact in this area,” he said. ”There are strong markets in housing for empty nesters and for houses in the $175K to $200K range.”
The only segment of the local housing market in which Schlachter has seen any weakness is in houses selling between $300K and $400K.
”Sales of these houses are largely a function of job growth,” Schlachter said. ”When the local economy is soft, there is a lack of employees transferring in with larger employers as they set up operations.”
Schlachter said local Realtors, through groups such as the Home Builders Association and the Toledo Board of Realtors, actively work to attract employers.
”The Regional Growth Partnership (RGP) has worked hard to bring new employers to the area,” he said. ”Toledo real estate interests have contributed a lot of money to the RGP, because we know that creating jobs is good for the real estate business.”
The prices of homes in Ohio have not kept pace with the national average, rising only 23 percent since 2000.
Schlachter said if a serious correction occurs in housing markets, Ohio may fare better than other regions.
”There has to be a serious imbalance between asking prices and market values for a major correction,” he said. ”There is nothing like that overall in Northwest Ohio.”
Sclachter said a number of factors besides speculation have helped boost housing prices.
”The rising costs of construction help drive up prices,” he said. ”Uncertainty in the stock market has also fueled it, as houses are seen as safe investment havens with built-in tax advantages.”
One positive sign in the local market, Schlachter’s said, has been the number of homes for sale.
”There are over 700 more homes for sale compared to this time last year,” he said. ”This shows confidence on the part of home buyers.”
One of the keys to the growth in housing prices has been affordable mortgages, which Treece indicated were at historic lows.
”Interest rates cycle on a regular basis, and we are near the bottom of what they have been in the last 100 years,” he said. ”This is the best time to get into a long term low-interest rate mortgage.”
Treece said speculators in real estate will likely be the hardest hit if there is a contraction in housing markets.
Real estate and mortgage professionals, Treece suggested, may be in for a shock if housing markets contract.
”The people who can’t see a speculative bubble are those closest to it,” he said. ”In the late 1990s, many speculators were not worried about warning signs in tech stocks.”
Treece said overconfident dotcom speculators tried to downplay the worries of traditional analysts.
”They called it a ’new paradigm,’” he said. ”Well, I’ve got a pair o’ dimes in my pocket, and that’s about all some of those NASDAQ speculators had left after the bubble burst.”