Global Housing Boom May Cool Slowly, Avoiding a Crippling Bust

The biggest housing boom in three decades among industrialized nations appears to be headed for an extended whimper, but the odds of a debilitating bust in housing prices will rise should Federal Reserve Chairman Ben Bernanke and other central bankers feel compelled to lift rates sharply to fight inflation. Paul van den Noord, senior economist for the Organization for Economic Cooperation and Development, concluded in a paper last month that a one to two percentage point increase in interest rates would boost the chance of a home-price collapse in the U.S., France, Denmark, Ireland, New Zealand and Spain to 50% or more. But an extended period of stagnation rather than a bust is a more likely ending for the housing boom in the U.S., according to Richard Brown, chief economist at the Federal Deposit Insurance Corp. Historically, just 17% of local housing booms in the U.S. go bust, according to data collected by his agency, and that typically occurs only when local regions are under severe economic stress, such as Texas in the mid-1980s after a plunge in oil prices. In Australia and Britain, after rising at annual rates of 20% early this decade, housing prices leveled off as interest rates climbed, the economies slowed without falling into recession and now the markets are picking up. “Housing prices have been moving up slightly, but not particularly dramatically,” Bank of England Governor Mervyn King said on June 29. “The housing market is back to normal.” (www.bloomberg.com)
Bloomberg.com (7/3/06); Rick Miller and Simon Kennedy

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Price Increases Migrating to Poorer Neighborhoods

A quarterly report on the housing market in the District of Columbia by the Urban Institute finds that housing prices are leveling off in affluent neighborhoods but escalating significantly — at an annual rate of 18% or 19% — in poorer areas. Housing construction in the city rose to a 40-year high last year, with 2,860 permits, an increase of nearly 50%. And in the first three months of this year, 1,327 permits were issued, up 135% over the same period last year. However, all of the homes under construction have been condominiums or apartments, as opposed to single-family housing, raising concerns that a continuation of current trends could lead to an imbalance in the housing supply favoring singles and childless couples. “We’re heading in a direction that maybe we want to stop and think about,” said Peter Tatian, a senior research associate at the institute. “If we’re not attracting families as well as singles and couples without children, we’re creating a population base that is not going to be as stable in many neighborhoods. People will come here and spend a few years, and when they decide to get married or start a family, they leave.” (www.washingtonpost.com)
Washington Post (6/28/06); Lyndsey Layton

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The Price Is Right — Maybe

Uncertain about what price tag to put on their property, home sellers are using such non-traditional approaches to setting prices as starting high and cutting the figure every few weeks, dropping the price to a different bracket or giving a range of numbers rather than one set number. An advocate of “value range pricing,” Carlsbad, Calif. broker Carlton Lund says that his listings for almost a decade have come with a price spread of between 10%-12% and the approach has worked well as a way of widening the pool of buyers and getting them to the table. However, in research on 6,000 homes in Texas, Marcus Allen, a professor at Florida Atlantic University, has found that using a price range increases the amount of time it takes to sell a home by 5% without having any positive impact on the final price. Resorting to price brackets is an approach supported by a National Association of Realtors® study last year finding that eight out of 10 buyers begin searching for a home online, where price parameters are entered into search engines. Houston real-estate broker Melinda Noel says that the span often depends on the price. Buyers tend to look in $20,000 to $25,000 increments for homes under $500,000, in $50,000 increments for homes between $500,000 and $1 million, and in $250,000 increments over $1 million. She counsels sellers to set a price at the top of a break point, and then jump down a whole notch if the market doesn’t respond, say, from $749,000 to $699,000. “The goal is to hit the top of the market, without going over the edge,” she says. (www.wsj.com)
Wall Street Journal (6/30/06); June Fletcher

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Cities Are Hot Again

In a recent teleconference of Coldwell Banker real estate brokers around the country, it was reported that retirees, empty nesters and young professionals are repopulating center cities. Continuing a trend that began in the late 1990s and reversing the post-war urban flight to the suburbs, the return to downtown is now strengthening. “I think it’s likely to continue for the next 15 years,” says John McIlwain, senior fellow for housing at the Urban Land Institute. “Boomers are aging and people think of cities as a good place to retire to, as well as to continue to work.” Avoiding increasingly longer commutes is part of the attraction. “For years people traded a commute for affordable housing,” says Jim Gillespie, CEO of Caldwell Banker, but the road construction has not kept up and the only escape from the traffic is a home in town. A reduction in crime has also brought people back, according to McIlwain. New York, for example, saw its crime drop by 75% from 1990 to 2005. That’s why recent statistics showing an upswing in violent crime are worrisome. Although crime was up only 2.5% nationally, it marked the first increase since 2001. Murders jumped 23% from 272 to 334 in Houston; from 330 to 377 in Philadelphia, a 14% rise; and 10%, from 131 to 144, in Las Vegas. If felonies spike, those considering relocating could hit the brakes pretty quickly. (www.cnnmoney.com)
CNNMoney.com (6/15/06); Les Christie

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Selling Your Home in a Down Market

Advising home buyers that few large-scale remodeling projects pay for themselves when the home is eventually sold, Consumer Reports magazine does recommend some remodeling strategies aimed at improving sales in today’s cooling housing market. Improvements that protect a home from deterioration and damage, like roof replacements and plumbing and electrical upgrades, are always worthwhile, the magazine advises, because they will help preserve the home’s value. At the very least, prospective buyers will expect a good exterior paint job, and that may mean sprucing up the trim. Adding a swimming pool can decrease the selling price because of insurance and maintenance costs, and when it comes to improvements overall, home owners should keep up with the Joneses but not go them one better if they are concerned about recovering remodeling costs. Projects that merely update styles can help the house sell more quickly, if the home is being sold while the style is still popular. Otherwise, stick with the basics and avoid being overly trendy, the magazine says. If interior painting looks dirty or worn, repaint with neutral colors that provide potential home owners with a clean slate. Keep tables and countertops clean and clear, and remove extra furniture, which can be sent to a rented storage space if you don’t want to get rid of it. (www.consumerreports.org)
Consumer Reports (6/06)

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Modular Doesn’t Mean Moderation

Although modular still accounts for less than 3% of new, single-family home building, the benefits of assembly-line-style construction are winning converts amid labor shortages and rising land and material costs. “There’s not much question that modular is the wave of the future,” said Don Carlson, who for 40 years has published Automated Building magazine. “They’re all overbuilt,” he says. “If you want to be some place in a hurricane or an earthquake, you want to be in a modular home.” Modular builders, developers, investors and consumers often have a story of surprise about their first experience with the housing. Russell Smith, a native of Rock Hill, N.C., said he was “blown away” 13 years ago when he toured factories and high-end modular homes. In business since 2000, his company now builds about 80 houses a year, and they are nearly all modular. He figures he could only do about half that without modular because it’s faster. But he says what really sells it is the strength and quality of the product. Modular has to be extra sturdy to withstand being jostled hundreds of miles down the road and then outfitted with slings and hoisted into place by a crane. Still facing skepticism from buyers, many modular builders are putting factory-built cost savings — which can be as much as 15% — into extra amenities. “We’re going into the finest neighborhoods and building modular next to site built,” said Smith. “We can’t just be competitive. We have to be better.” (www.charlotteobserver.com)
Charlotte Observer (6/29/06); Stella M. Hopkins

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