Analyst Gauges Housing Market Boom
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JIM LEHRER: There’s a hot real estate market in many parts of the country right now. Both housing starts and sales have been strong. There was more evidence today from the Commerce Department, which reported housing construction was up 11 percent last month.
Jeffrey Kaye of KCET-Los Angeles reports on one of the hottest of the hot markets in southern California.
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JEFFREY KAYE: With self-help preacher Tony Robbins kicking things off, a recent gathering at LA’s convention center had all the trappings of a revival meeting.
(Cheers and applause)
Thousands came to a two-day expo hoping to learn how they could turn investments in real estate into personal riches. For between $30 and $500 a ticket, attendees could hear tips about buying, selling and trading properties. And they could get an earful from dozens of vendors, all hawking their own products and strategies to reach easy street through real estate.
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JEFFREY KAYE: The carnival atmosphere was a reflection not only of the booming real estate market, but the get-rich-quick investment fever which surrounds it. Nationwide, 55 urban areas are experiencing boom real estate conditions, according to a recent government report. Most of those boom markets are along the coasts. In California, the median price of a home has risen to half a million dollars, more than twice the national price. For those in the housing business, these are gold rush days.
MOHAMED EDLEBI: This is like maybe the most exciting things the last two years for realtors.
JEFFREY KAYE: Mohamed Edlebi is both a real estate agent and an investor. He left a high-end Italian clothing business to trade properties like this one, a San Fernando Valley home he bought for half a million dollars. In seven months, he’s almost doubling his investment, as the offers pour in.
MOHAMED EDLEBI: I get six offers between 1 and 3. By the time I left my office — I left this house at 3 o’clock. I arrived at the office, I have another five there.
JEFFREY KAYE: At Dilbeck Realtors in LA’s San Fernando Valley, office manager Bonnie Strassmann says more often than not, buyers engage in bidding wars. She’s seen as many as 30 bids on one property.
BONNIE STRASSMANN: Coming in full price is not going to get the buyer the house anymore. So the buyer definitely has to pay more than full price, and then comes, how much more? I heard of one the other day that just went for $75,000 over asking.
JEFFREY KAYE: But housing price inflation has put home ownership beyond the reach of many Californians. Only 18 percent of the state’s households can afford to buy that median priced home of half a million dollars.
SYLVIE MADORE: We were surprised by how expensive a lot of the houses that don’t look very good are, and the prices just keep going up.
JEFFREY KAYE: Sylvie Madore has been looking for a house for five months. She’s made offers on six different homes, and has been outbid every time. The owner wants $800,000 for this property in Sherman Oaks, California. It’s a three-bedroom house with a converted garage in the back. Madore’s not enthusiastic, but she’s learned that if she wants to buy, she’ll have to compromise.
SYLVIE MADORE: We’ve been saving for a few years, and we thought we were at a point where we could find a house that we liked in the neighborhood we liked in the price range we had, and there’s no way we can put all three together. So either we have to get a house we don’t like as much in the neighborhood we want, or we have to get a house that’s really nice in a neighborhood we really don’t want to live in.
JEFFREY KAYE: One big reason for the housing boom in southern California, as elsewhere in the country, is low interest rates for home loans. On the supply side of the equation, prices have been driven up by a shortage of affordable housing. One reason for the shortage: Homeowner groups in urban areas often oppose increased density and new developments. Boom prices in cities are fueling a construction boom in the outskirts of suburbia. Developer John Young is one of the largest home builders in the fast growing counties east of Los Angeles, the so-called “inland empire.”
JOHN YOUNG: In the state of California, we think we need 250,000 units built per year, and we’re building about at a 200,000 clip right now. So what does that do? You keep adding that up for a year, in 10 years that’s 500,000 homes that we needed. So it accumulates every year that we don’t build enough homes.
JEFFREY KAYE: Residents here put up with long commutes, often one to two hours each way, but home prices are half what they are closer to Los Angeles or the coast. Elizabeth and Rene Burgos are moving to a desert community, where housing is more affordable.
RENE BURGOS: Two hundred thousand dollars cheaper. And I know some over here are like a quarter million, a quarter of a million over here. But over there it’s like, it was at $100,000, now they’re going to $200,000 to $300,000.
JEFFREY KAYE: We met the Burgoses at a forum put on for Spanish-speaking buyers by local government. Educator Monica Nazar explained there is government assistance for purchasers, but she says enthusiastic buyers should be alert for scams.
MONICA NAZAR: Maybe they thought there was no pre-payment penalty and now there is. Maybe they thought it was a fixed rate and now it turns out to be an adjustable. And people are not knowledgeable and they are afraid to ask the questions, so they sign.
JEFFREY KAYE: High home prices have made it tough for some businesses to recruit workers from outside California. Since buying an affordable home is a pipe dream for most residents, Los Angeles has one of the lowest home ownership rates in the country. About 60 percent of city residents rent. But tenants, too, are facing a crisis. There’s a shortage of affordable rental housing.
ALISON DICKSON: So right now the housing authority is basically just trying to duke it out with the owner.
JEFFREY KAYE: Activists, like tenant organizer Alison Dickson of the Coalition for Economic Survival, say real estate speculators are making a bad situation worse by driving up rents.
ALISON DICKSON: The greatest threat to affordable housing are greedy developers, people who are more concerned about making a buck than housing Los Angeles tenants.
JEFFREY KAYE: Dickson says one case illustrates her point: a 48-unit building in central Los Angeles. Tenants here have received federal rent subsidies since 1981, but the property was recently sold. The new owner has pulled out of the subsidy program and is raising rents. Tenant Kathleen Lindo, who is on disability, says she doesn’t know what she’s going to do.
KATHLEEN LINDO: Now I’m paying $305.
JEFFREY KAYE: And what will — and the increase will be how much more?
KATHLEEN LINDO: About $1,100, $1,200 more. So he wants that as of June 1.
JEFFREY KAYE: And you just don’t have the money.
KATHLEEN LINDO: No, I sure don’t.
JEFFREY KAYE: While Dickson is critical of the current owner, she is furious at the previous landlord. Ironically, that was the Union Rescue Mission of Los Angeles, which provides services for homeless people in downtown LA. The mission bought the building as an investment, held it for eight months, then sold it last year at a profit of half million dollars.
ALISON DICKSON: Union Rescue Mission, whose very purpose, you know, is to serve the homeless community, and here they are, actively, through their actions, fueling, you know, the fire of the homelessness problem.
JEFFREY KAYE: Union rescue mission representatives say the buyer assured them he’d keep the rents affordable. They say the profit from the sale helps fund homeless services. Neither they nor the building’s new owner, Jeffrey Greene, would answer questions on camera.
The low-income renters here, worried about rent increases and evictions, seemed a world apart from the nearby expo that screamed “Real estate equals wealth.”
Experts are debating how long the housing boom might last. Some economists say expensive homes are overvalued, and prices will fall, particularly if interest rates go up and mortgages become more costly. Others point out that home prices are influenced by regional factors such as income levels and housing availability. But at the real estate wealth expo, there was no ambivalence.
DEAN SEIF: There may be adjustments in prices, in values, but it’s not a bubble where it’s going to burst and you’re going to lose everything. That’s just not going to happen.
JEFFREY KAYE: In southern California, as the real estate frenzy continues…
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JEFFREY KAYE: …would-be tycoons hope to grab what they can while they can.
JIM LEHRER: Jeffrey Brown has more on the housing situation nationwide.
JEFFREY BROWN: And for that I’m joined by Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. Welcome to you.
NICOLAS RETSINAS: Nice to be here.
JEFFREY BROWN: So we’ve just one very hot market. Where else do you see this kind of activity?
NICOLAS RETSINAS: That is among the hottest markets. Over the past several years, the two coasts particularly have had the fastest rate of home price appreciation. There are a couple of other spots but essentially it’s bi-coastal.
JEFFREY BROWN: And are the factors driving it similar to what Jeff Kaye was showing us in southern California?
NICOLAS RETSINAS: I think generally true. I mean, the housing market across the country has been very prosperous. Last year nationally home prices went up a little over 10 percent. But in those local areas you do have the supply constraints that were alluded to and you have growing demand. The result is high prices.
JEFFREY BROWN: Now, this is not the case everywhere. There are some places where it’s flat or even prices falling. Tell us about that.
NICOLAS RETSINAS: Sure. A couple years ago there were nominal drops in places like San Jose, places like Austin, places like Salt Lake City.
JEFFREY BROWN: Some of these around the tech.
NICOLAS RETSINAS: Yes, all around the tech. Today there are a handful of places, pockets of small metropolitan areas in the South and Southwest where there is a flattening. So, no, it’s not across the board. Some places are hotter than others.
JEFFREY BROWN: But what makes things flat? What is special about those particular areas or regions?
NICOLAS RETSINAS: Well it is local. It is local, local, local; it’s demand and supply.
JEFFREY BROWN: Just as they say about buying a home.
NICOLAS RETSINAS: Absolutely. People don’t buy homes in the United States. They buy it in particular areas, even particular neighborhoods. And it’s the factors in those neighborhoods that influence prices the most.
JEFFREY BROWN: And so it is really tied to the local economy.
NICOLAS RETSINAS: It is very much so. Overall, the market has been affected by low interest rates but the particular spikes I think are much more directly related to local factors.
JEFFREY BROWN: Now the question that has been raised in this piece and I think probably you and I were talking about this, I don’t know where you are, but nothing gets people’s interest more than their homes, the price of their homes, what’s happening to it. As soon as a “for sale” sign goes up, this is of interest to people.
NICOLAS RETSINAS: Oh, very, very much so. For most Americans, their home is the bulk of their wealth. That is how they have created wealth, how they’ve accrued wealth. And it far outweighs what they have in the stock market.
JEFFREY BROWN: And the question that Jeff Kaye has put on the table in his piece is about this boom versus bubble.
NICOLAS RETSINAS: Right.
JEFFREY BROWN: Now what are the factors that help us help a person determine what’s going on?
NICOLAS RETSINAS: Well it’s clearly a boom in that the rate of appreciation has been just so staggering, again, double-digit appreciation. The bubble question is, is it prone to a sharp correction or to a sharp fall? And there are disputes about that. Ultimately though I think you go back to the fundamentals. Look at the demand. Are we forming new households? If we are, they have to have places to live. Are there constraints on supply? To the extent there are constraints on supply and the market can’t respond freely, then you’re unlikely to see sharp corrections.
JEFFREY BROWN: Do we see the kind of speculative churn that Jeff Kaye showed us in southern California? Do you see that else where, where people are buying them, flipping them rather quickly?
NICOLAS RETSINAS: We do see in selective markets like California where there has been an increase in investor purchases, in some places double what it was five years ago. It’s hard to tell. We don’t have good data to what extent that’s purely for speculation. Some of that may be second homes but you’re absolutely right. And he was right. If investors are coming in, in large measure, they are in large measure coming in for resale, as opposed to the homeowner that still is interested in consumption — that is living in the home.
JEFFREY BROWN: This means in terms for low-income housing, that’s a problem in other areas of the country.
NICOLAS RETSINAS: It’s a real problem. This has been the story of the last several years of winners and losers. Those who have owned a home have been winners. Those who have not are losers. And with this price appreciation there are many people who are going to be left behind for a good, long time.
JEFFREY BROWN: Now, the way Jeff has laid it out there was one way of looking at it is that homes might be overvalued and could fall. Do you see signs of that in specific places yet?
NICOLAS RETSINAS: Well, I don’t think it’s going to be possible in areas like southern California to maintain this rate of appreciation. Over time, it has to be reconciled with income growth because if you buy a home, you’re generally borrowing money. And if you’re borrowing money you have got to pay it back, and that’s related to how much you earn over time, so at some point there has got to be a closer fit. But I think, given those fundamentals, you’re more likely to see stagnating prices as opposed to falling prices.
JEFFREY BROWN: The other way of looking at it is that people have to live somewhere and so they don’t necessarily have to turn them over.
NICOLAS RETSINAS: Yes. Really what determines a bubble is generally if you’re forced to sell. Home prices are an interesting phenomenon in economics. They have — they’re often called sticky prices.
JEFFREY BROWN: Sticky prices?
NICOLAS RETSINAS: Yeah, you put your home on the market. And you think this is what it’s worth, and you find out other people don’t think what it’s worth. What you’re likely to do is just take it off the market unless you’ve lost your job and you’ve had to move. So that which might determine a bubble in selected areas, look at that economy, look at what’s happening at the jobs. That will determine where prices go.
JEFFREY BROWN: So the individual should really look at his or her own local economy or I guess what I’m asking you is how much is it a local phenomenon when we think about what’s happening to housing prices as opposed to our national economy?
NICOLAS RETSINAS: Well, it is affected nationally because we have national home markets for loans, for mortgages. And certainly low interest rates have propelled and under girded this market. Particular rates of appreciation above the norm have to do with local factors. So a person in a particular area should, yes, look at their own economy but also look in the mirror. If they’re pretty sure they’re not going to have to sell, they could probably ride through any sort of correction. So those are the factors you really need to look at most closely.
JEFFREY BROWN: And finally how important are these factors we’re talking about the housing market, how important are those to our national economy?
NICOLAS RETSINAS: Oh, it has shored up the economy. Many of us believe even during a recession it was the housing sector that kept us through, the ability of people to refinance and take out cash. Just one specific number to give you an example: Home building accounts for about 5 percent of our economy. But over the last five years it’s accounted for 12 percent of our average growth so it is disproportionately contributed to this economy.
JEFFREY BROWN: OK, Nicolas Retsinas, thank you very much.
NICOLAS RETSINAS: Thank you.