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| The Basics | Where are house prices headed in your town?
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With supply tight, rates low and the economy recovering, the only real check on sales in 2004 may be the shocking price tags. See how your home town stands.
By Elizabeth Razzi, Kiplinger
Home-sales records have been shattered over the past three years. But economists see the trend's end in 2004, together with a moderating of the stunning price increases across the country. Then again, they predicted as much for 2001, 2002 and 2003. Will this be the year they get it right? Maybe, but even some of the experts are beginning to doubt themselves. "It's starting to drive us a little crazy," admits David Seiders, chief economist for the National Association of Home Builders.
The numbers through 2003 certainly don't show any weakness. Sales of existing homes are expected to close the year at 6 million, up more than 400,000 from the year before, according to the National Association of Realtors. The group estimates the median price nationwide rose almost 9%, to $172,100. That handily beats 2002's 7% increase. Most housing economists are predicting a slowing of price increases in 2004 to about 5%, but we wouldn't bet on it.
Affordability worries
The reason a slowdown in housing prices is no sure thing is that, economically speaking, the only factor that might finally cool the rising-sales-and-prices trend is the increase in prices themselves. Certainly other economic factors won't slow the trend. Mortgage rates are expected to stay attractive at below 7%, the economy is picking up steam, and unemployment is dipping at last.
But price increases, especially along the coasts, have been stupefying. Median prices in New York City and its suburbs soared 50% to 60% over the past five years. Prices in parts of Florida shot up more than 50%, driven partly by second-home buyers.
Californians are staggering under the weight of house inflation. For example, the median price in Orange County is 123% higher than it was in 1998. The California Association of Realtors estimates that only 23% of California households can afford to buy a median-priced home. If the 13% price increase that the association expects to occur in 2004 does come to pass, only 19% will be able to buy.
Another factor that points to continued strong price increases is the relative lack of houses on the market, which gives home sellers the upper hand. To have a situation in which neither sellers nor buyers have much leverage in negotiating price, the market needs a six-month home supply. (Supply is defined as how long it would take to sell the current number of homes listed at the current sales pace.) Nationwide, there is now about a four-month supply. California has a mere two-month supply.
The situation could spell trouble for those just entering the housing market. Burdensome mortgages (and high bills for health insurance and education) are pushing more middle-class families into bankruptcy, says Elizabeth Warren, a Harvard law professor and author of "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke." She says that families have bid up the price of homes in good school districts so high that middle-class buyers can't purchase a house they'd want without devoting two incomes to the mortgage.
"In areas such as Washington, D.C., New York, Boston and San Francisco, people earning $150,000 a year feel as trapped as those making $75,000 in less expensive places," she says.
More on the financial outlook for 2004
First-timers stretched thin
John Tuccillo, a consultant and former chief economist for the National Association of Realtors, says Warren's theories are on the mark. "The only thing that's bailing home buyers out now is very, very low interest rates," which, says Tuccillo, make mortgages more affordable. The problem is that many of these buyers are first-timers with little equity and little cash in reserve. They are stretching themselves so thin that if their income falls -- one spouse loses a job, for instance -- they're at risk of defaulting on the loan.
Of course, stretching to buy a house isn't new, says Daryl Jesperson, CEO of Re/Max International. "There isn't a buyer who doesn't want more house than he can really afford," and who doesn't count on a growing income to ease the burden, says Jesperson. But incomes have been growing slowly, if at all, in recent years, he says, leaving people financially strained and vulnerable for dangerously long periods.
Warren advises couples to take a hard look at how much income goes to housing: "If it's going to take two salaries, think a second time about whether you can afford that mortgage." If a couple goes ahead with such a large mortgage, they should have a cash cushion to help them through a financial emergency.
Shannon and Greg McConnell thought twice and then bought a new four-bedroom house in a Dallas neighborhood where prices range between $300,000 and $400,000. Between Shannon's income as a sales manager for a human-resources company and Greg's earnings as a lawyer, they could have afforded quite a bit more. But they decided to limit their mortgage payment to an amount they could handle with just one salary. "We didn't want to borrow near what we were approved for," says Shannon.
Luxury homes selling again
Affordability, however, is not a concern for everyone. Brokers interviewed said that luxury homes (those starting at $750,000 to $1 million, depending on the community) began selling strongly again late in 2003, after cooling off earlier in the year.
Chiropractor Donna Maddox expected that it would take four to six months to sell the lakeside home in Tampa she shares with her husband, Michael Jacobsen, also a chiropractor. They asked $985,000 for the house, which has an 11-seat home theater, swimming pool and oversize garage that can accommodate three cars, a boat and a couple of jet skis. "With our economy the way it's been, I felt the market was soft," she says. But a buyer agreed to the full price in three weeks.
Condos trump houses
Prices for condominiums are strong across the country and are increasing much faster than those of detached, single-family houses --17% versus 9%. That's a switch: Condo prices historically lag behind those of houses. Van Davis, CEO of Century 21 Real Estate, says the trend reflects both the need of first-time buyers for lower-priced condos and a demand from baby-boomers for luxury condos in fashionable neighborhoods and in vacation or retirement communities. About 40% of condo buyers are 45 and older, according to the National Association of Realtors.
Mark Bartikoski, owner of a Re/Max brokerage in Spring Park, Minn., says typical buyers of fashionable loft condos overlooking the Mississippi River in Minneapolis are "well-to-do, retired empty nesters who are selling their paid-for house in the suburbs and moving to the hustle and bustle at the core of the city." Many of the condos he's selling are in buildings that were once part of Minneapolis's grain-milling history -- including warehouses and factories -- and cost between $500,000 and $1 million.
The other force driving condo sales is first-time buyers who might prefer to move into a detached house but can't afford one, says Jesperson of Re/Max. "For such entry-level buyers, the single-family home is no longer attainable," he says. "They need something with shared walls."
The median price of a resale condo was $167,000 in the third quarter of 2003, a relatively high price that reflects the growing popularity of expensive condos. Among first-time buyers, a more modest condo -- which offers tax deductions for mortgage interest and a chance to build up an equity stake that they might later use as a down payment on a house -- is more typical and sometimes an irresistible alternative to paying rent.
Alex Perriello, president and CEO of Coldwell Banker Real Estate, says he expects strong condo demand -- and appreciation -- to continue. "I don't think the demographics are going to change. With the first-timers and the retiring baby-boomers, you're attracting both ends of the spectrum."
Home prices: What's up in your city
Metro areas on both coasts dominate the rising home-price derby. Only two of the 25 cities -- Phoenix and Las Vegas -- with the highest percentage change in median home prices in 2002-03 were from interior states, according to data prepared for Kiplinger's by consulting firm Global Insight.
Where are home prices headed in your area?
Here are the one-, three- and five-year appreciation rates for more than 300 metropolitan areas across the United States.
Alaska thru Mississippi | Montana thru Wyoming
For increases from the median in 2003 to the median in 2004, Global Insight is predicting the top areas will be better dispersed across the country, split about evenly between coastal and noncoastal areas.
Cities such as Santa Fe, N.M., Denver and Pittsburgh will be near the top of the pack with price increases of about 4%, predicts Global Insight. The firm also says that some of the boom regions in 2003 will be laggards in 2004. Areas such as Fort Lauderdale and West Palm Beach, for example, which recorded increases of about 9% from 2002 to 2003, will barely budge in 2004.
Some areas that have traditionally been in the forefront of rising prices have finally slowed down. San Francisco has the highest median home price, about $576,000, and also has one of the highest five-year percentage changes, at about 63%. But prices there rose only about 3% from 2002 to 2003. Likewise, Boston's wild price increases of the past five years, totaling 66%, appear to have calmed down.
Copyright 2003 The Kiplinger Washington Editors, Inc.
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