As we’ve forecasted previously in Trends, the prices of higher-end homes, which cost $1 million and up, have softened in recent months. But overall, U.S. housing prices have continued to rise, climbing 14.5 percent in the year ending June 30, 2005. That’s the fastest annual pace in 25 years.
Because of this rapid growth, the risk of price declines has increased in 36 of the nation’s 50 largest housing markets, according to the PMI U.S. Market Risk Index. The index is featured in the Summer 2005 issue of the Economic and Real Estate Trends report from the PMI Mortgage Insurance Co. It suggests that six markets are more than 50 percent likely to experience falling prices in the next two years: Boston, Long Island, San Diego, San Jose, Santa Ana, and Oakland.
As Marco Van Akkeren, an economist with PMI, explained, “We are continuing to witness record-pace home price appreciation in many markets without the necessary gains in income, home affordability, and rent inflation. This is causing the current home price environment to diverge from long-term economic fundamentals, which cannot be sustained indefinitely.”
Fortunately, the study still predicts only a 21.3 percent probability of an average house price decline within the next two years, across the 50 largest housing markets. Nevertheless, the five markets mentioned earlier are definitely showing signs of bubble conditions and the broader markets are still moving in that direction.
A big part of the reason why the housing bubble is growing is that speculators have inflated the market, purchasing homes and reselling them at a quick profit when prices go up. The National Association of Realtors estimates that 23 percent of homes purchased in 2004 were intended as investments.
Many investors buy homes and rent them out at a loss in the belief they only need to wait a year to resell them at a profit. In other cases, investors buy townhouses and condos and resell them even before they are built. As The Economist reports, about half of the condos in Miami are sold this way, and many properties are sold two or three times before anyone moves into them.
When we originally examined this housing boom back in November 2003, we expected Federal Reserve actions on short-term rates to combine with the growing Federal Budget deficit to drive up...
