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Housing prices could pay off or pop

By ROBERT TRIGAUX, Times Business Columnist

© St. Petersburg Times, published June 9, 2002

Housing prices are continuing to go up, and the stock market is continuing to go down. Where do you want your money? -- John K. McIlwain, senior fellow for housing, Urban Land Institute.

Housing prices are continuing to go up, and the stock market is continuing to go down. Where do you want your money? -- John K. McIlwain, senior fellow for housing, Urban Land Institute.

* * *

Folks may be paralyzed when it comes to investing money in the iffy stock markets. But they're not hesitating for a moment to spend aggressively to buy a home. No matter the price.

Get used to it.

"More markets in the United States are overpriced now than I have ever seen," says Ingo Winzer, who tracks housing prices in 130 U.S. metropolitan markets as president of Local Market Monitor, a real estate research firm in Wellesley, Mass.

The Tampa Bay area is one of those markets.

By Winzer's numbers, which compare what local people earn to the price of area housing, Tampa Bay area homes are overpriced by 13 percent.

By state and national standards, that's not bad. In Fort Myers, homes are overpriced 24 percent. And in Fort Lauderdale, homes are overpriced by 35 percent, Winzer says.

Don't even ask him how stratospheric home prices are in such markets as San Francisco and Boston.

No wonder there's such a growing buzz these days about a U.S. housing bubble, one just waiting to be popped like the deflated dot-coms. San Francisco's housing bubble already popped, says Yale economics professor Robert Shiller, a partner at the Case Weiss Shiller real estate consulting firm. Shiller is the chap who raised a red flag about a stock market bubble in the late 1990s.

So what is a bubble anyway? In housing, it's a scenario where the increasing prices of local homes outstrip the ability of most local household incomes to afford them. It typically occurs when flush and competing buyers agree to pay higher and higher home prices, while assuming another round of buyers will be waiting and able to pay even more when they sell. When those later buyers do not materialize, the real estate bubble bursts and home prices fall.

Bubbles occur. And pop. In the early 1990s, California housing prices, already the most expensive in the country, skyrocketed, then dropped dramatically. It took years for the market recover.

I prefer a closer-to-home definition of bubble. It's when someone buys a home on your own street at such an absurdly inflated price that the entire neighborhood laughs in nervous disbelief and asks: Which lottery did they just win?

When my wife and I bought a St. Petersburg home in 1991, our neighborhood was reasonably stable, certainly not flashy and definitely not appreciating much. We used to joke about whether we'd be around long enough, literally, to see any nearby house break the $200,000 sales barrier.

We were way off. Home prices began to pick up steam in the latter 1990s, then accelerated three years ago. Next door, a house was sold in 1997 for $185,000, upgraded and cleaned up, then sold at almost triple the price last fall for an astonishing $550,000.

That's just one example of the runaway price tags on many Tampa Bay area homes and housing in other U.S. major metro areas since '98.

Fast-rising prices are good news for folks who own homes. Tough luck for renters and home shoppers. And a potentially unsettling trend for national and local economies that prefer high percentages of home ownership.

By national standards, the 25 percent jump in Tampa Bay area home prices in the past few years is not enough (yet) to be called a true bubble. But housing prices generally have been rising at a rate many economists think is unsustainable.

And it's been happening at the oddest part of our economic cycle.

While the U.S. economy has been sliding and a couple of million people lost their jobs this year, the property market has headed in exactly the opposite direction. That's not supposed to happen.

Here are three reasons to be worried about a real estate bubble:

The decline of the stock markets reduced people's main source of 1990s wealth and made them more vulnerable to becoming overextended in their home purchases.

Escalating home prices rely on today's super-low mortgage rates to help buyers afford housing. When rates go up, fewer buyers will qualify for high-price homes, setting the stage for a collapse.

Homeowners gained equity as their homes appreciated. The bad news is many homeowners tapped their nest eggs via home equity loans and carry a substantial levels of debt. For the record, total household debt stands at $7.4-trillion. That's almost double what it was at the beginning of the 1990s.

After Sept. 11 showed us how easy it was to turn the world upside down, the prospect of all these bad signs reaching a critical mass no longer sounds farfetched.

Nonsense, more optimistic real estate watchers say, offering counterarguments:

Even if many local housing markets are currently "overpriced," it means home prices will plateau, not plummet. As long as local economies are reasonably strong, local incomes will catch up.

If a bubble did not burst during our current recession, why should it happen now that the economy shows sign of getting stronger?

Most economic experts suggest in comments to the press that the popping of a nationwide real estate bubble is as likely as the Tampa Bay Devil Rays winning the 2002 World Series in four games. Consider the recent views of these four experts:

"We believe that the population that has yet to move into the home ownership category is substantial. Demand is going to outpace the growth of supply, and that will support prices. . . . I am not in the school that believes in the bubble," says Doug Duncan, chief economist for the Mortgage Bankers Association of America.

"Fear of a pricing bubble would drive people back into stocks -- which Wall Street would surely love -- but it is just not the case," National Association of Home Builders chief economist David F. Seiders says.

"The biggest problem seems to be an inadequate supply of housing, which makes it impossible to have a housing bubble," says economist Ross DeVol, director of regional studies at California's Milken Institute.

"I don't think we have a bubble in house prices. First, let's remember it's very difficult to get one. Unlike stocks, where you have a single market, low transaction costs and an ability of people to pile on nationally and cumulatively, residential housing markets are all local," Federal Reserve chairman Alan Greenspan says.

Yep. Sure sounds reassuring. Just remember Rule No. 1 about economic failures and burst bubbles. The powers that be don't always see them coming.

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.

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