Rhode Island and Massachusetts are among seven U.S. states in which homebuyers have
“over-expectations” for prices, said Karl Case, a visiting scholar at
the Federal Reserve Bank of Boston.
“People are very optimistic about what’s going to happen to
their property,” Case said in a Bloomberg News panel discussion
in Boston. “Is that a bubble? There’s an element of over-
expectations, but there’s certainly not a bubble nationally.”
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Property owners in Massachusetts,
Connecticut, Rhode Island, New Hampshire, California, New York,
and Hawaii have paid more for their homes than their incomes
would usually allow them because interest rates are near record
lows, said Case, who’s also an economics professor at Wellesley
College and a founding partner in real estate research firm Case
Shiller Weiss Inc.
Moreover, the three-year bear market in stocks
has increased the allure of real estate investments, he said.
The median household income grew 2.2 percent between 2000
and 2002, according to the U.S. Census Bureau. In that time, the
median home price grew 14 percent, according to the National
Association of Realtors.
The National Association of Realtors said earlier today that
Americans bought existing homes at a record annual rate in
September, drawn by low mortgage rates. Sales rose 3.6 percent to
an annual rate of 6.69 million.
The median price of a previously owned home in September was
$172,300, up 9.1 percent from a year earlier. The average rate of
annual appreciation was 4.3 percent over the past 20 years,
according to Lawrence Yun, an NAR economist.
Home prices climbed 7.7 percent in 2002, according to
Freddie Mac, the second-largest U.S. mortgage buyer. The pace
likely slowed to 4.9 percent this year, and probably will average
5 percent in both 2004 and 2005, according to Frank Nothaft,
Freddie Mac’s chief economist.
In Massachusetts, home prices may be a “balloon with some
air deflating rather than a bubble that bursts,” said Mark
Lippolt, an executive vice president with Coldwell Banker
Residential Brokerage and a panelist at the Bloomberg News
conference “U.S. Real Estate: Is There a Price Bubble?” He
oversees 21 branch offices in the metropolitan Boston area.
The average rate for a 30-year fixed mortgage held at 6.05
percent last week, the same as a week earlier, according to
Freddie Mac. The rate is about three-quarters of a percentage
point above the 45-year low of 5.21 percent seen during the weeks
ended June 13 and June 20.
Historically, a rise in interest rates to 8 percent has
slowed home sales growth, Lippolt said. Given current mortgage
rates, however, an increase to 7 percent may “chill” sales, he
said.
“Seven percent is a benchmark we’re looking for right
now,” Lippolt said.
One result of the high home prices in the Boston area is
that developers have converted such properties as a former
prison, a bakery and a funeral home into condominiums, Lippolt
said.
“Churches, parking lots, garages — every sort of thing
that can be turned into condominiums will be if the trend
continues over the next few years,” he said.
Condominiums are cheaper than single-family homes in most
U.S. markets, creating more demand and faster price appreciation
for that type of housing, Lippolt said.
The median price for a condominium gained 15 percent from a
year earlier during the second quarter, the latest data available
from the National Association of Realtors. That’s double the 7.4
percent growth in prices for single-family homes in the same
period, the Washington-based trade group said.
Sales of condominiums and cooperatively owned apartments
rose to a record 861,000 at a seasonally adjusted annual rate in
the second quarter, according to NAR.
Bloomberg News
