TOPICS > Economy

Home Sales Hit New High

August 26, 2002 at 12:00 AM EDT


GWEN IFILL: Now the housing story. Sales of new homes shot up 6.7 percent in July, to the highest monthly level on record. With short-term interest rates now at 41-year lows, consumers have continued to buy homes at a blistering pace, in spite of an otherwise weakening economy. But some pessimists are still bracing for a collapse. What keeps the housing boom booming?

Here to explain: David Lereah, chief economist at the National Association of Realtors; and Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard. So, is this housing boom too hot not to cool down, David Lereah?

DAVID LEREAH: Well, I don’t think it’s going to cool down anytime soon. The primary reason why housing is hot is because of mortgage rates. Mortgage rates right now are at all-time lows, as you just mentioned earlier, and that’s making homes more affordable for the low-income households.

And it’s also making homes affordable and better investments for the middle- and higher-income households. So all the stars are aligned right now. The housing markets are in relatively good shape. You’ve got a lean supply of homes, low mortgage rates and very, very healthy price appreciation, and that’s giving us a great environment for housing demand.

GWEN IFILL: Eric Belsky, is this something that’s happening nationwide or just in selected markets?

ERIC BELSKY: No, this is a national phenomenon. In some places clearly house prices are going up much more rapidly than in other places but, by and large, most places are seeing significant house price gains and strong housing markets.

There are a few exceptions. They tend not to make the national news. Topeka, Kansas may not be doing great but for the vast majority of places housing is doing great and for the reasons that David, I think, described: Mortgage interest rates are at phenomenal levels, and in the United States people take advantage of those rates and that’s keeping the housing market strong as well as still solid income growth.

GWEN IFILL: Mr. Belsky, this actually sounds like it’s all good news except for one small problem. If you’re trying to get into this market low interest rates aside, the prices are pretty high, aren’t they?

ERIC BELSKY: Absolutely. When prices go up to the degree they have, this obviously has an affect on affordability. That hits hardest those people who have modest incomes and low incomes and first-time home buyers.

But you really can’t overstate the fact that interest rates have slid considerably, and we’re at a stage now where even though house prices have gone up, the actual affordability of homes for the typical first-time buyer in many markets is still good and, in fact, may even be better than it was a year ago.

And, again, there are exceptions in the most high price appreciation markets like Boston or Washington or San Francisco, and those kinds of places people are really having a hard time getting into a home and the escalating house prices are the reason for that.

GWEN IFILL: Mr. Lereah, what about the affordability question?

DAVID LEREAH: If I may add– I agree with Eric — affordability conditions are still very favorable but let’s look at the stock market because a lot of people like to compare stocks with real estate and that there was a lot of irrational exuberance as Chairman Greenspan talked about in the stock market, P/E ratios got way out of whack – going from 20 to 30 – to 200 to 300 -

GWEN IFILL: What’s a P/E ratio?

DAVID LEREAH: Price/Earnings ratios for companies. And then, you know, we’re talking about, well, the bubble burst in stocks so thus the bubble must be bursting in real estate.

GWEN IFILL: I’m sure I had that very conversation sitting at this table at the time.


GWEN IFILL: What’s the difference?

DAVID LEREAH: And the big difference is that I don’t see the irrational behavior in the real estate markets. People are buying homes to live in.

And when you look at the P/E ratios in real estate, which would be more of home prices to income or debt service to income, it turns out that home prices to income has risen somewhat but it’s still within an historical normal range.

The debt service to income actually has gone down because mortgage rates are so low, people don’t have this huge debt load in their homes because they’re taking out mortgages.

GWEN IFILL: So, Mr. Belsky, this is not the same thing as the tech boom. We should not be waiting for a bubble to burst.

ERIC BELSKY: No I really don’t think we’re waiting for a bubble to burst. As David said housing is just not like stocks. I think it’s understandable that people are concerned about their real estate holdings when they see their wealth evaporate as quickly as they did in the stock market but you don’t get an annual statement or a quarterly statement on your home and then rush out and sell your home.

Your home is a place that you live in and you tend to try and hold on to it as much as you can even in difficult times. We’re really not in any kind of situation where you could imagine the right set of circumstances coming together to have house prices fall in any significant way.

And there really aren’t many signs that you’d even see much easing in many marketplaces. You really do have strong fundamentals underlying the growth in home prices and while they may be getting out ahead in some places not dramatically so.

GWEN IFILL: I hear that term “strong fundamentals” a lot when talking to economists. I’m always curious. In this case what does that mean?

ERIC BELSKY: Well, in this case it means that demand is strong. There are a lot of people who are in the market looking to buy houses because household growth is vigorous, and that’s a demographic phenomenon as well as an economic phenomenon. You do have growth in disposable incomes.

As we said you really have actually fairly good affordability conditions because interest rates are so low. People can reach with those interest rates to buy homes that perhaps before they couldn’t. You have a lot of low-income buyers in the market as a result of some great efforts on the part of industry to reach out to low-income markets in ways that they hadn’t in prior decades. And so you have really a lot of fundamental demand built up, and you don’t really have a lot of supply out there to purchase.

That’s why prices go up and people are able to still afford them because the interest rates allow them to afford them. So all these things mean that we’re in a fairly safe zone with some exceptions, some metropolitan areas that you look at the extent to which house prices have gotten out ahead of income and you worry that there might be at least a slowdown in prices but no conditions that would suggest a downturn. That would require really concentrated job loss in one or two markets.

GWEN IFILL: Mr. Lereah, we talk about consumer behavior in all this. Consumers are going out there and refinancing, they’re buying and taking advantage of low interest rates. What about business behavior?

Is there any possibility that home builders are going to go out and build a whole bunch of homes and increase the supply that Mr. Belsky was just talking about to the extent that the market cannot support it?

DAVID LEREAH: No. That would have already happened because home builders learned lessons from the last recession, the 1990-91 recession where we really did have an oversupply of homes, the month’s supply of homes was very high so thus we did have prices– the price bubbles deflating a good deal.

This time around, the supply of homes is very, very lean. It’s almost half of what it was during the 1990-91 recession, so I think home builders will not get caught with their financial pants down anytime soon and as a matter of fact when you look at housing starts and construction activity, it’s lagging behind home sales activity.

GWEN IFILL: I read a story I think in the Wall Street Journal, I think, that some people are selling their properties, moving out and renting and then waiting out the bubble figuring that they can cash in later on. Is that something that’s happening?

DAVID LEREAH: No, I don’t think so. I think… I saw that same article. I think those are outliers. They talked to some people that are doing that but generally speaking people are in homes. It’s been a great investment.

You’ve been building your wealth very well. The returns are solid. And for people that are in the stock market and are nervous and have lost a significant amount of wealth, the housing market represents a safe haven as well as good investment returns.

GWEN IFILL: Mr. Belsky – is a slowdown — I’ll be the pessimist here. Is a slowdown kind of inevitable after things have been riding so well for so long?

ERIC BELSKY: Well, you would expect the rate of growth to slow at some point because it hasn’t been frankly dramatic and I think it’s been dramatic for reasons that are understandable. It’s not that these are deviating from something that we might expect although they are going quite fast.

So you would expect some slowdown but again the issue is, is this something that people should fear in terms of losing value in their homes? Again, it doesn’t look like that that’s what’s going on here, that you might see some slowdown, but no dramatic softening. And I agree, this notion of people going out and selling their homes and then renting, if that were the case, you’d see a real run-up in the supply of homes for sale on the market and that’s not a run-up that we’ve seen.

So I think that people are buying homes to live in them. They’re supported by strong demand. Therefore, I don’t see any real bursting of a bubble. But, yes, you could easily see a slowdown in growth and perhaps even a flattening of growth in those places where house prices really have gone up in a dramatic way relative to the incomes of the people in that community.

GWEN IFILL: Mr. Lereah, is the strength of the housing market enough to prop this economy up when in every other measure it seems to be sliding especially if the Fed decides to lift the lid on interest rates and go back to raising them again?

DAVID LEREAH: Well, look at last year. Last year the housing markets set a record. And housing contributed to 68 percent of economic growth last year, which is just an incredible statistic. So can it support and prop up the economy?

The answer is yes, it already did it last year. Will it this year? For the first half of this year housing did contribute to GDP growth, economic growth, but in the second half of this year we can’t sustain this record-setting numbers forever. We are coming down a bit in terms of construction activity and home sales activity so I don’t expect housing to make marked improvements to economic growth going forward.

But I do expect the health of the housing sector to help the health of other sectors of the economy. You buy a house, you’re buying furniture. You’re buying appliances; you’re landscaping your house. There’s many different services that are impacted positively by housing. I think that should continue for the rest of this year.

GWEN IFILL: We’ll be watching. Eric Belsky, David Lereah, thank you very much for joining us.

DAVID LEREAH: Thank you, it was fun.

ERIC BELSKY: Thank you.