Housing boom 2.0
Harvard study says there may be bumps along the way, but that the long-term health of the housing market is intact.
By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - The housing market is entering a down cycle, according to a report from Harvard's Joint Center for Housing Studies, but is unlikely to undergo a severe reversal.

The market may face risks as interest rates rise, decreasing affordability and expanding inventories, according to the study, but the market will suffer only a modest downturn unless the broader economy collapses and jobs dry up.

"There may be tough times ahead," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard, "but housing will emerge stronger than ever."

Demographic changes and population expansion will help keep home demand - and prices - healthy. The number of homes needed to meet demand in the next 10 years will likely exceed the 18.1 million units built from 1995 to 2004.

Several factors are at work.

Booming household growth. The nation will add 1.37 million new households this year. Part of this is natural population increase but this has also been bolstered by foreign migrants.

Graying boomers. As boomers have aged and prospered, they have begun to buy vacation or second homes in increasing numbers. This trend will widen as they near retirement.

Changing household composition. Social and cultural changes add to the number of households. There are more single-person households than in the past. Fewer adult children live with their parents; they establish their own homes. Increases in divorce rates result in the division of multi-person households into smaller ones. Family sizes have shrunk; a community may have about the same population but more households.

Minority gains. Ownership among formerly under-represented minorities has increased. Black and Latin home ownership has always trailed that of whites but the past 10 years has seen minorities making great progress.

Downplaying the risks

The Harvard researchers downplay the risk in mortgages with adjustable rates and easy downpayment requirements. Those loans introduce uncertainty, some worry: if interest rates rise, owners could find themselves with much higher monthly payments and that could result in a big jump in foreclosures and forced sales, adding to home inventory and hurting prices.

The Harvard researchers don't expect that to happen, though. Most owners with risky loans have already seen their home values grow substantially. "Having significant home equity is the best protection against foreclosure because homeowners can sell at a profit if they cannot cover their mortgage payments."

Home equity accounted for a healthy 56 percent of the total value of primary residences in 2004, the most recent equity data available, according to the study. Ninety-four percent of homeowners had equity of 10 percent or more and 87 percent had equity of 20 percent or more. Only three percent of homeowners had equity stakes of less than five percent.

Even if home prices fall in the next few years, the drops are unlikely to erase all the equity of the great majority of homeowners, the Harvard researchers predict. And the interest rate declines that usually accompany such price drops would enable many borrowers to refinance their homes at favorable terms. All this should help prevent large price drops.

Government influence

Government regulations, by limiting supply, also make it unlikely that housing prices will fall greatly. Land use restrictions, zoning laws and building codes make building housing difficult and expensive.

As Lawrence Yun, managing director of quantitative research for the National Association of Realtors, points out, in general, places with expensive housing are often the hardest places to build.

"Builders tell me that getting paper work through in places like Atlanta, Indianapolis or Dallas is a fairly easy process. In other places, such as San Francisco, it's a horrifying experience," he says.

"In many areas," says Retsinas, "we see such an anti-development bias. And the trend is to more restrictions, not less, even though markets are softening."

The study's bottom line is that the U.S. economy is sound and that any softening in housing markets should firm up before long. As Retsinas says, however, it's a big country; a lot of different areas have their own characteristics and it's hard to generalize.

"Long term fundamentals are still positive," he says, "but some areas may be more susceptible to a slide."


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