Real estate experts line up on both sides of the are we in a bubble? question, with some saying the market is overheated, while others cite reasons why investment properties will continue to appreciate.
For boomers, however, the question is more than just an airy philosophical argument and takes on real weight given the fact that the number of boomers putting money into real estate is on the rise. Boomers surveyed by AARP in 2003 reported increases both in home ownership and investments in real estate.
In 2003, 78% owned their own home, up from 73% in 1998. Additionally, 37% said they were putting money into real estate, up from 29% in 1998, AARP reports.
Good job growth and more stability on Wall Street will keep the market strong, says Barbara Stone, president of Regency Capital Realty, New York. Purchases of residential units as an investment will continue to appreciate at a 3%-6% rate but not at the 13%-14% rate that occurred in the last year, she adds. “It is still a good solid market.”
As interest rates increase, there may be some leveling of demand and a slight increase in foreclosures but not to any great extent, Stone says. The rise in interest rates will deter the market from becoming investor-driven, thus helping maintain its value, she says.
“There is no bubble. Quite the contrary,” says David Barnes, director of global relocation with Siderow Kennedy Real Estate in Chappaqua, N.Y. In Westchester County, just north of New York City, there is an overwhelming demand and a small supply, he continues. The average house will achieve more than is asked if it is in good condition and well priced, he adds.
Conditions contributing to the strong market include low interest rates and a good job market, he explains. Relocation is also a factor in the markets strength, he says.
If interest rates edge up, the market should remain strong, but if they jump up 2% that could be another matter, Barnes says. Buyers are financing their purchases in a variety of ways ranging from cash to 15- to 30-year fixed mortgages to interest-only mortgages, he finds.
The market has “raced away” in many places creating $1 million towns where until recently a home could be found for $500,000, Barnes says.
“If you spoke to me last spring, in 2004, I would have told you that there was a bubble,” says Paul Purcell, a partner with Braddock+Purcell, New York, and former president of Douglas Elliman. “There was an extremely frenzied pace. Unhealthily so,” he says. And the pace was evident on both the East and West Coasts, he continues.
It was unhealthy, he says, because the appreciation was based solely on price increases and not on an increase in unit sales. The situation was one in which building could not be completed fast enough, and there were multiple offers and bidding for available properties, Purcell says. “Things have settled down, but there is still a period of limited inventory,” he adds. While it “feels less frenzied, there is still an active market. Prices are holding but are not accelerating as fast.”
One reason the market is still strong, according to Purcell, is that the boomer population has a tremendous amount of money. Wealth is being transferred, which is a different situation from boomers parents who lived in a generation which did not have wealth unless they were born into it.
In addition to inherited wealth, boomers also are earning a lot more money, Purcell says, and when they buy second properties, they are buying bigger houses for retirement homes and for appreciation.
Signs of a real estate bubble boomers will have to watch for include the exit of savvy investors and poor cash flows on invested properties, says Hugh Bromma, author of “How to Invest in Real Estate & Pay Little or No Taxes,” and a founder and CEO of Entrust Bank and Trust and Entrust Administration Inc., Oakland, Calif.
If someone does buy at the top of a bubble, Bromma advises hanging on and waiting for the market to rebound. He also advises using a 30-year fixed mortgage in most cases, not an adjustable-rate mortgage.
Carl Haacke, author of “Frenzy: Bubbles Busts and How to Come Out Ahead,” a founder of Skylight Consulting, New York, and a former White House economic policy advisor, says there is a real estate bubble, although given the exuberance in the market, “It is hard to be a skeptic.” The data seems to contradict those who think there is a bubble, he says. “The longer the bubble lasts, the harder it becomes to maintain the belief the bubble will burst.”
One problem, Haacke explains, is that in “the court of public opinion,” skeptics have a “convoluted story” of trying to explain issues such as rising interest rates and the impact on real estate. Additionally, he says, those who think there is a bubble face “head winds of enthusiasm.”
Haacke cites two signs of an impending bubble burst: the popularity of ARMs and the “record high” carrying costs of owning a home. “The combination of ARMs and carrying costs will create a burden. People are squeezed and will become more so.”
Reproduced from National Underwriter Edition, March 25, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.