housing market is cooling in an orderly
and moderate fashion, he admits that rising interest rates
are making buying a home more difficult.
After five years of record sales, and a 14-year run,
according to research performed last year Harvard University's
Joint Center for Housing Studies, a cooler housing market
is bound to impact economic growth going forward. Some
say it already has, despite inflation rearing its ugly
head causing economists to assume that the Fed is far
from finished raising short-term interest rates. Long-term
interest rates will follow, or the economy will move
into recession.
In fact, the situation is exactly as the Harvard researchers
predicted a year ago -- that the hot housing market
is masking "eroding affordability and mounting
risks."
It's the risks that are slowing housing:
* buying a home costs approximately 30 percent more
than renting a comparable home
* double digit housing inflation took place in one
third of the largest metros in 2004-2005
* condominiums have appreciated three times the rate
of single-family homes since 2000
* housing costs coupled with doubled energy costs is
slowing homebuyers
* goods that have been cheaper because of imports,
such as clothing, are suddenly more expensive
* May 2006 mortgage interest rates are at a four-year
high
* while the economy grew at 4.8 percent in the first
quarter of 2006, some analysts expect a slowdown to
around three percent
Housing drives approximately 40 percent of the consumer
price index, says the government, which calculates such
things by excluding food and energy, but including housing
rental costs. Curiously, the CPI index does not include
housing costs to buy a home.
With high home prices forcing many homebuyers out of
the market, rents are rising, which in turn is causing
inflation to appear worse.
Observes Marketwatch reporter Greg Robb, the government
uses an "owner's equivalent rent" as a measure
as if the owner were paying rent to himself. Some complain
this is an inaccurate number because its imaginary where
as real rents are quantifiable.
If inflation escalates in real terms, that could have
a trickle down effect on consumer spending and jobs.
As it is, builder confidence was at its worst level
in 12 years, and housing starts and building permits
are down.
But a funny thing is happening. While sales slowed
in 2006, home price appreciation grew. In fact, the
rate of appreciation is about the same as it was from
2001 to 2005, when sales set records for five consecutive
years.
NAR's first-quarter metro area single-family home price
report, covering changes in 149 metropolitan statistical
areas, showed 60 areas with double-digit annual increases
and only 16 metros experiencing price declines.
David Lereah, chief economist for NAR says, "A
steady rise in mortgage interest rates has slowed home
sales in higher cost areas, yet job growth in some moderately
priced markets is boosting sales in other areas,"
he said. "The net effect is a modest decline in
home sales for the nation as a whole, but sales remain
historically strong and are providing a solid underlying
base for the overall economy."
While homes sales are off five to 20 percent in the
hottest markets, the national median existing single-family
home price was $217,900 in the first quarter, up 10.3
percent from a year earlier when the median price was
$197,600.
So what's driving housing to continue at near-boom
rates? Affordability, says Lereah.
"Quite simply, affordable metros are in favor
and unaffordable metros are experiencing a correction,"
he says. |
