TOPICS > Economy

The Home Front

May 28, 2002 at 12:00 AM EDT


RAY SUAREZ: In April, sales of existing homes shot up to an annual rate of almost 5.8 million homes a year, a substantial increase over the March figure. The sales numbers zoomed ahead even as unemployment was reaching an eight-year peak in that same month. The median price of a single family home in America moved past $153,000 in April, up more than 7 percent in a year.

RAY SUAREZ: Joining me now are Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, and David Lereah, chief economist at the National Association of Realtors.

Well, Nicolas Retsinas, in the last year we’ve had terrorist attacks, the ensuing war, rising unemployment, many months of dropping consumer confidence, and still these numbers are robust. Why?

NICOLAS RETSINAS, Harvard University: It really is truly remarkable. We study these kinds of economies over the long term, and this one is truly different. In the past, we almost used the housing sector to determine whether a recession was coming, but this time it really is different. The housing sector, indeed, is shoring up the economy. It seems that people are still buying homes; they’re still building homes, despite this bad news.

RAY SUAREZ: David Lereah, what’s driving this market?

DAVID LEREAH, National Association of Realtors: Well, first, I think the housing markets are like the Energizer Bunny. They just keep on going and going and going, and they’ve been doing this for the last two years. Go back to fundamentals. Mortgage rates are at historic lows. There’s a lean supply of homes, consumer confidence is still high, and the economy is now in a recovery period. So this is a great mix for a very favorable backdrop for housing activity.

RAY SUAREZ: Are there that many more people in the marketplace now?

DAVID LEREAH: There aren’t more people, but there are people that now want to buy homes. Remember, the boomer generation, which was the largest generation we’ve ever had, they’re now in their peak earning years. So their home ownership rate is high compared to other age groups. Mortgage rates are at cyclical lows, so that’s bringing in the low-income households and minority households into the home-buying process.

RAY SUAREZ: Anything else driving this process that you can see, Nicolas Retsinas?

NICOLAS RETSINAS: Well, part of it is growth, it is sort of fundamentals, but I think the other thing that doesn’t get noticed as much is there’s a much more efficient housing finance system. It is easier today to borrow money for a home. There is less friction in the transaction.

And for many people, when they look at the volatility of the stock market, think "aha, better I should set apart any money I have in my home, because now can I get it whenever I want." It’s called refinancing or home equity loans. So there are a lot of both sort of fundamental features and structural features that are undergirding this market.

DAVID LEREAH: I also think that, to piggyback on what Nick just said, it’s the stock market that has done so poorly that has given rise to a significant demand for homes in the housing market for investment purposes. Look at the boomers, for example. The boomers right now are looking to buy second homes. So you get these aging boomers or even just the aging population in the 65-year-old group. They’re selling a house, they’re buying a smaller house, but they’re using the capital gain on their sales to by a second house, because they want to put their money in real estate rather than the stock or bond market.

RAY SUAREZ: So they’re consciously making a decision, "Oh, the market’s performed badly lately. This is safer for me."

DAVID LEREAH: I think they’re just psychologically feeling more comfortable with real estate versus stocks.

NICOLAS RETSINAS: Well, it’s, also, it’s become, as I said before Ray, it’s also become a much more liquid asset. Ten years ago, there were certain hurdles you had to jump over in order to sort of refinance. Now you get an offer to refinance almost on a weekly mailing. So it’s the liquid asset that can be used for other purposes, which is why you have so many other millions of homeowners who refinance not only once, but often multiple times during the period of ownership.

DAVID LEREAH: To add one more point, mortgage products, there is just a wide menu now of mortgage products out there to satisfy every taste and desire of a consumer, of a household that wants to buy real estate. If you want to live in your house for three years, one year, three years, five years, or for the long-term, there is a mortgage product for you. So it is a lot easier right now.

RAY SUAREZ: Let’s talk a little bit about prices. In your forthcoming report, Nicolas, you mention that in dozens of metropolitan areas, houses have in fact reached an all-time high. Are there a lot of consumers who are going to start servicing mortgages that will be bigger than the value of the house down the road, where they will be paying more than they… than the core value of the house?

NICOLAS RETSINAS: That’s certainly a danger. And we do have increased vulnerability in part due to some of the mortgage products that David talked about, because most of those mortgage products involve smaller down payments.

However, as we look again at those sort of fundamentals, while we don’t believe that the kind of rapid price appreciation we have seen over the last couple of years can be sustained over the long term, we don’t see significant price corrections. And for most people, if there isn’t a significant price correction, there’s really no necessity to sell their home. So prices aren’t likely to go tumbling, unless we have some major economic contractions.

DAVID LEREAH: I agree with Nick, and also to add to that, it really goes back to supply and demand. And right now the supply of homes is very, very lean. Go back to 1989, the ’90-’91 recession where home prices almost turned negative nationally. They actually increased 0.5 percent, as flat as you can get. The month’s [ph] supply of homes, which is how we measure homes available for sale, was over nine months; today it’s 4.8, almost half.

So we have a very lean supply of homes right now. It’s very difficult to concoct a scenario where if the demand for homes drops meaningfully, you would have a large drop in home price appreciation.

RAY SUAREZ: But aren’t there other things besides demand and supply that feed into price? When I saw that number, 7.1 percent, that’s much more than people’s incomes have risen in the past year, it’s much more than the core rate of inflation, so the houses have appreciated beyond the inflation rate. What’s pushing that number?

DAVID LEREAH: It’s a very good point, and it’s demand that’s pushing it. There’s excess demand for the given supply. But when you look at income keeping pace with home price appreciation, you’re absolutely right. Over the last 10 years, income has not kept pace. Income gains have not kept pace with home price appreciation, but if you look at it in an historical context over the last 30 years, the ratio of home price to income is about average.

NICOLAS RETSINAS: I think in recent years, Ray, one of the things that’s allowed that kind of imbalance to go on are low interest rates. In a sense low interest rates stretch a dollar of income so they can buy more house.

RAY SUAREZ: So you feel more comfortable taking on a bigger mortgage, in other words?

NICOLAS RETSINAS: Well, you’re able to do so. Because basically a lower interest rate allows the same dollar to go farther, because the cost of money isn’t as high. But you’re right sort of fundamentally, that over the long term, there has somebody some relationship. But the other thing I think that is also affecting that number in terms of those comparisons is the home we’re buying today is a different home than we bought 10 years ago. So in a sense, we’re getting more out of that home than we used to. But saying all of that, I would agree with the earlier point, which is this level of appreciation we’ve seen the last particularly two or three years, really can’t be sustained much longer.

RAY SUAREZ: Well Nicolas Retsinas, does that create winners and losers as well?

NICOLAS RETSINAS: Always, always winners and losers. The big winners have been people who have owned homes, particularly people who take advantage of low down payment programs, have really seen their equity increase almost twofold in the space of three or four years. The losers are the people who are shut out, the people who can’t get in this housing sort of carrousel, and can’t take advantage of this appreciation.

RAY SUAREZ: Is that where these new kinds of mortgages come in, David Lereah?

DAVID LEREAH: Well, right now, lenders, realtors, home builders, Fannie Mae, Freddie Mac, all the different real estate-related organizations are trying hard to bring everyone into the home-buying process. It’s difficult. We’ve made great strides; we’re still far apart. There are still big differences in home ownership rates among minorities, low-income households compared to whites that are middle-class or high-income.

So we have a long way to go, but we have made some positive movements in the right direction, and hopefully Nick will agree with that. We just still have a long way to go.

I would also caution that we’ve done all this in a very low interest rate environment. And if interest rates begin to creep upwards, and if the economy begins to show more robust recovery, the Federal Reserve, which now is sitting on its hands, history tells us, it will raise rates not once, not twice, but probably numerous times. And that could really hurt and dampen the demand for homes, and hurt the families and households we really want to get into the home buying process, which are minority and low-income.

RAY SUAREZ: And hurt the economic recovery, too, Nicolas Retsinas?

NICOLAS RETSINAS: Absolutely. The housing sector in total, when you add what people spend for homes, what they spend for appliances for their homes, and other kinds of expenditures, accounts for almost a fifth of the Gross Domestic Product. So it’s become a core of our economy.

Ray, I want to speak a little bit to that issue of disparities, because I’m not quite ready to break out the champagne on that. We’ve made a lot of progress over the decade, but the fact is in terms of disparity between, for example, the white home ownership rate and the minority home ownership rate, it has narrowed by about 1 percent. And that’s over the best of times.

So while we’ve made some progress, we have a long way to go when the home ownership rate is about 25 points higher for white Americans than non-white Americans.

RAY SUAREZ: Quick response, David Lereah.

DAVID LEREAH: And I agree. We’ve taken small steps; they’ve gone in the right direction. We have not gone backward which is good, but Nick is absolutely right. We need to take much larger steps going forward. I would also add that in terms of housing’s contribution to the economy, this is an amazing statistic. But last year, housing contributed to 61 percent of GDP growth. So it really tells you how important housing was to keep the US economy afloat.

RAY SUAREZ: David Lereah, Nicholas Retsinas, gentlemen, thank you both.


DAVID LEREAH: Thank you very much.