Home Sweet Home
03/01/2005
Ask an economist to forecast what the residential real estate market looks like for the months ahead and you will hear plenty about a moderate increase in interest rates and avoiding unforeseen setbacks to job growth and the overall economy. In other words, not many economists care to be overly specific, especially when asked to name the top markets to watch in 2005.A gun-shy economist can be forgiven, however, when you take a look at what happened in 2004. About this time last year, most real estate analysts were saying that as those alluring 4 percent mortgage rates of the previous two years crept closer to 6 percent, the market would cool and home prices would plateau. Instead, the value of an average home in the United States jumped by nearly 13 percent. “It surpassed any increase we’ve seen in 25 years,” says Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight (OFHEO), the government agency that is responsible for tracking housing prices around the country.
The giddy upturn was even more pronounced in major cities, where the appreciation rate was closer to 20 percent. And while it is more difficult to gauge the luxury home market, most data indicate that its values increased at an even higher rate—in the 30 percent range. The most remarkable increase came in Las Vegas, where home values in 2004 gained a stunning 41.7 percent over 2003, the highest increase ever measured in a large U.S. metropolitan area.As home ownership in the United States now approaches 70 percent of the population, a record by any measure, the big question remains: Can real estate’s wild ride continue? Many industry experts, like Patrick Lawler, chief economist with the OFHEO, predict a deceleration in home value growth in the months ahead, especially in areas that were white-hot in 2004. “The increases just can’t hold like they have in the past. Home price inflation has been particularly steep when compared to the price of nonhousing goods and services,” says Lawler. “While house prices grew 12.97 percent in the last year, other goods and services, as measured by the Consumer Price Index, grew by only 2.68 percent.”
Low interest rates have spurred what can only be described as a home buying frenzy in recent years, and everyone agrees they are headed up. But just how high is a point of contention. Doug Duncan, chief economist of the Mortgage Bankers Association, predicts the average interest rate on the benchmark 30-year mortgage will top out at 6.3 percent, down from earlier forecasts of 7 percent. Others, such as Michael Carney of the Real Estate Research Center at California State Polytechnic University, Pomona, say the 30-year rate might hit 8 percent in 2005. That would seem to be a huge jump, one that might price out many buyers and put the skids on the market. Not so, says Carney. “Demand is just so strong, I don’t see anything that would cause a major collapse for the next five or even 10 years,” he says.
When it comes to pulse-taking, the Washington, D.C.–based Urban Land Institute does an exhaustive job of publishing an annual Emerging Trends in Real Estate report that includes prognostications culled from in-depth interviews with hundreds of economists, money managers, real estate consultants and investors from around the country. “It’s not particularly sexy and it sounds boring, but when more than 500 people respond to your survey and you interview 150 of them at length, you can extract a consensus that generally tends to come true,” says Peter Korpacz, who directs the global strategic research group for PriceWaterhouseCoopers and is one of the principal researchers of the institute’s 2005 report. Among the report’s predictions:
• Real estate, in general, will outperform stocks in 2005, and residential real estate has the best investment potential, ahead of domestic stocks as well as commercial
real estate.
• Some areas in the Sunbelt will face potential growth slowdowns as traffic and sprawl reduce their desirability.
• Real estate investing will become even more clustered in the coastal markets, especially Southern California and South Florida. Indeed, of the 20 metropolitan areas with the highest rates of annual real estate value growth in 2004, 11 were in California and four in Florida.
Based on the Urban Land Institute’s survey and the projections of other real estate experts, the list of the top real estate markets to watch this year shapes up like this:Washington, D.C.
No, it doesn’t have the glitz of Las Vegas or Miami. “But when you’ve got the U.S. government as your neighbor, it can make your property golden, even in times of a downturn,” says Stephen Plank, a senior resident fellow with the Urban Land Institute. “Despite the Bush administration’s alleged intention that government should get smaller, it hasn’t, and nothing seems capable of slowing down this particular market.” The condominium market is on fire, and the Virginia and Maryland suburbs can’t keep up with the demand for new homes. (On the commercial front, downtown D.C. is the only U.S. office market with a vacancy rate below 10 percent.)
San Diego
Despite the fact that annual home prices here have appreciated
20 percent or more in each of the past three years, demand still far exceeds
supply. Best predictions say all of Southern California could add the population
of Chicago twice over in the next 20 years with San Diego attracting the bulk of
the newcomers thanks to its strong job market, the delightful downtown harbor and Gaslight District and the idyllic
blue-sky weather.
Miami-Fort Lauderdale
South Florida dodged the four
major hurricanes that devastated much of Florida, meaning builders and
developers are not playing catch-up with storm repairs and can concentrate on
satisfying the needs of well-to-do baby boomers, who are looking to secure
second homes with ocean views and easy access to golf courses.
Las Vegas
Even if Las Vegas’ real estate market cools off a bit in 2005, it would
still be sizzling. It has the highest-percentage job growth of any major
metropolitan area and it has lots of raw land in inventory.Greater Los A
ngeles
This includes the Riverside-San Bernardino-Ontario region, which
enjoys a certain halo effect from the Las Vegas phenomenon. In 2004, it ranked
No. 2 in appreciation, with a 34 percent growth in value, followed by
Oxnard-Thousand Oaks-Ventura (No. 4, with 31.2 percent growth) and Los
Angeles-Long Beach-Santa Ana (No. 6, with 30.5 percent).
Honolulu
Hawaii,
in general, stands to gain from a rebound in the Japanese economy and a
weakening of the U.S. dollar. Plus, the tourists are back in force.
New Y
ork
Yes, the average price of a co-op apartment is now more than $1 million.
No, it doesn’t seem to have put the brakes on demand.
Tampa-Orlando
More
than 900 new residents pour into Florida each day, and even if many of them head
toward Miami, that still leaves plenty for the I-4 corridor. A new force in
this market: second-home buyers from Great Britain.
Phoenix
In 2004,
for the eighth year in a row, 35,000-plus new homes were built in Phoenix, and
150,000 new residents move to the area each year.
The Carolina Corridor
It’s finally emerging from Atlanta’s shadow. A lovely coastline, a
scattering of mountains, decent weather and golf courses galore are luring
well-heeled retirees here in droves.