Housing bubbles could burst in coming years
Question: Joyce, what is the talk about “housing bubbles.” I am curious to know what the forecast is for appreciation.Answer: My answer to your question comes from a recent article published by Inman News. As you read the article, my comment about the Summit County real estate market is that this market falls into the category of property poised for appreciation, based on a close analysis of supply and demand and continued low interest rates. The article follows: The housing market remains unusually strong, but speculators and lenient lending practices do pose a risk for the real estate industry, said David Lereah, chief economist for the National Association of Realtors.
Lereah, during a presentation Thursday at the National Association of Realtors’ midyear meetings, said he expects that some hyper-extended local real estate markets will sour within the next couple of years, while the overall housing market should remain robust for at least the next couple of years.”Loose lending and speculative buying – that, in my opinion, is the greatest risk that our industry faces right now,” Lereah said.Wall Street analysts are definitely paying attention to the migration of investors to the real estate sector, and that has put the industry under increasing scrutiny, he also said. “They are watching us. We are under a microscope.”Analysts have found some reason to be concerned – increasing debt, fast-rising home prices in some markets, a larger share of adjustable-rate mortgages, and a higher share of home-price-to-income and home-price-to-rent ratios in some markets. Financial scandals that have plagued mortgage giants Fannie Mae and Freddie Mac could lead to some industry-shaking reforms, the trade deficit is swelling, oil prices are gushing, and the value of the dollar is dropping.Most local “balloons” in home prices “will deflate rather than pop,” though “several local markets will pop over the next couple of years,” he said.Among the indicators of a market headed for a bust: home sales falling, price growth below historical average, more than a 6.5-month supply of housing, properties taking longer to sell, job loss in the area, rising mortgage rates, negative net migration, and rising loan-to-value ratios.The days of successful speculative buying in some real estate markets are numbered, Lereah said, citing the example of pre-construction buyers in a hot real estate region.
“People will purchase pre-construction and they’ll flip it and make some money. Can they sustain it? No. At some point that won’t work.” While there are speculators, their activity represents only a small part of overall home buying, he said.There is definitely a flip side to the negative indicators, though, Lereah added. Inventory is still constrained in many markets, producing the simple economics of high demand. “How many times do we have to tell Wall Street that demand is higher than supply?”The Baby Boomer generation continues to invest heavily in real estate, and housing is still largely affordable in most parts of the country. “The stars are aligned for the housing sector. I say this is the Golden Age of real estate,” Lereah said.For the past four years, Lereah has predicted a let-up in the galloping housing market, but he said it hasn’t yet paused for breath.Unless interest rates rise above 8.5 percent, affordability should not be a problem, he also said. Modest increases in interest rates and inflation should allow a soft landing rather than a freefall for the real estate industry, he added.Housing markets in other nations exhibit more bubble-like symptoms than the U.S. market, Lereah noted, with the United Kingdom and Spain, for example, reporting some very high price-to-rent and price-to-income ratios.Lereah expects 6.5 million existing-home sales in 2006, compared to a projected 6.71 million this year. New-home sales should also drop slightly, from a projected 1.18 million this year to 1.05 million next year.
Rates on the 30-year fixed mortgage, meanwhile, could increase from about 6.1 percent this year to 6.7 percent by year-end 2006. And existing-home prices should slow, from 7.1 percent appreciation this year to 4.5 percent appreciation in 2006.Question: We have been told that our home has not sold because it is not in good “showing condition” and that we need to make some changes. What should we do to entice more buyers? Answer: There are a number of inexpensive steps that homesellers can take to prepare their home for potential buyers. One is to hire a designer, who, for about $60 an hour, will offer advice on a home’s interior. You can also paint your home in a light, neutral color, because homebuyers may be turned off by bold colors. Consider what objects you should remove from the home before showing it to buyers. Any offensive items, such as a controversial picture, can annoy some buyers, while the more general problem of clutter can make a house seem smaller and less inviting. Professional organizers can help you arrange your possessions and decide what should be kept and what should be discarded. Finally, homeowners should consider the landscape, especially if the bushes and trees surrounding a home are too obtrusive and hide the home rather than enhance it.Call JOYCE NENNINGER at (970) 468-6800 or (800) 262-8442 for answers to your real estate questions. Or e-mail Joyce@SummitRealEstate.com or you can visit her website at http://www.SummitRealEstate.com. She has lived in Summit County for more than 20 years. Joyce is the broker/ owner of Summit Real Estate – The Nenninger Team at the Dillon Ridge Marketplace. Her longtime residency and years of real estate experience can help you make the most of any buying or selling situation. She is a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field. She ranks in the top 4 percent of Realtors nationally.Dillon Real Estate
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