One good thing you can say about the pundits who keep predicting that the end is near for rising home prices: They're consistent. They've been dead wrong year after year.
Despite their near certainty that the market would cool in 2004, median U.S. home prices rose 9%, and a vast majority of cities saw a bigger increase than in 2003. In fact, the National Association of Realtors proclaimed 2004 the hottest U.S. home-sales market in history. Says Thomas Kunz, CEO of Century 21 Real Estate: "There's been no rhyme or reason to prices because of multiple offers and bidding wars."
And those who fear that we're in a fragile real estate bubble can relax -- at least for now. David Seiders, chief economist for the National Association of Home Builders, speaks for most chastened housing-market analysts when he says that the chance that median home prices will drop is "zero nationally, zero in major regions and close to zero in any state," although some individual cities may see declines.
All the economic cards but one point to another strapping year for housing prices. Demand for new homes continues to be strong, driven by both first-time home buyers and people like Melani and Coates Lear, who are trading up from their Denver bungalow to a built-to-order house in a suburban development. In addition, a stronger economy, a stronger job market and higher incomes are the positives, says Seiders. He predicts the only moderating force will be modestly higher interest rates. (By "modestly higher," he means a rise from the current 5.8% to 7% for a 30-year fixed-rate mortgage.)
Most housing-market analysts now say they expect the median price increase to cool to the 5%-to-6% range nationally in 2005. Then again, that's the range they predicted for 2004. A cooling-off would also mean that houses stay on the market longer before they're sold, giving buyers more negotiating leverage.
Despite what you might think about soaring prices in your neighborhood -- or the neighborhood you'd like to live in -- investment strategist Ed Yardeni of Oak Associates says home prices aren't outrageous given the low interest rates. "You'd find out if this is a bubble if mortgage rates rose two, three or four percentage points." He predicts that would result in a loud pop, followed by falling prices. But Yardeni doesn't foresee such a hike in rates, and expects single-digit percentage increases in prices for the next three or four years.
Population boom
The demand that's driving the U.S. housing market comes from many sources. The country's population is increasing by about three million people -- or one million households -- annually, according to John McIlwain, of the Urban Land Institute. And it's no surprise that most of the growth is on the coasts, in so-called gate-way cities that see high rates of immigration, global trade and direct foreign investment (Chicago is also considered a gateway). Not coincidentally, gateway cities have also seen some of the biggest increases in home prices.
Other demographic trends are fueling this demand. Minorities, especially Hispanics, are buying in record numbers. The echo-boomer generation -- born between 1977 and 1994 and 72 million strong -- are beginning to enter the home-buying market. And don't dismiss their baby-boomer parents. Coldwell Banker Real Estate CEO Jim Gillespie points out that the youngest baby-boomers, in their early forties, are buying up, and the oldest, nearing 60, are in their prime earning years and also buying up or buying second homes.
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