Would-be homebuyers worry about overpaying, but economists disagree on likelihood of a bust

May 23, 2004|By Daniel Taylor | Daniel Taylor,SUN STAFF

When Seth Geoghegan studies house prices these days, it makes him think twice about becoming a homeowner.

"It seems like something's [going to] give," said the 24-year-old software engineer, who is looking to buy in Baltimore or Columbia, where he lives now. "Over the last several years, home prices have gone way up, seemingly without bound. If I was a long-term buyer who was going to be in the home for 15 years, this wouldn't really concern me. But since I know this is more likely a five- to six-year term for me, it does make me standoffish."

An increasing number of buyers such as Geoghegan are worrying about skyrocketing home prices. They consider today's values artificially inflated because of the scarcity of houses for sale and the long run of extraordinarily low mortgage interest rates.

Geoghegan doesn't want to pay too much for a house - an anxiety he shares with others as prices keep rising.

Talk of a housing bubble - artificially-inflated home values - that could burst has dominated the real estate industry as sales and price appreciation soared to record levels during the past three years. While most experts don't expect home prices to fall, they do predict an end to the double-digit price increases in Maryland and elsewhere.

Prices have gone up too fast because of the lowest mortgage rates in at least four decades, some experts say. And some think prices have nowhere to go but down now that borrowing costs are rising.

That, coupled with record refinancings and homeowners who have taken cash from their homes' equity to pay off other debt, could have a significant impact on some consumers.

"There's been an unprecedented run-up in home prices," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who thinks there is a national housing bubble. "A lot of this has been tied to record growth in debt."

Many economists sharply disagree with the housing bubble theory. They argue that consumers buy houses to live in them and that as long as the economy improves and jobs are added, housing remains a sound investment, especially for those who expect to live in their homes for years.

Several experts predict that demand for housing will continue to strengthen as the government and mortgage lenders work to make loans available to more buyers.

"On a national level, we're not in the price bubble camp," said Doug Duncan, chief economist for the Mortgage Bankers Association. "That doesn't mean there aren't some markets that will see a downturn."

The Baltimore region consistently has been ranked among the top 10 overpriced markets in the country, based on income growth and price appreciation. Economy.com ranks the Baltimore metropolitan area as the fifth-most-overpriced market in the nation. Area home prices rose 15 percent last year on average and 11 percent in 2002. Prices in Baltimore and the five surrounding counties averaged $211,636 last year.

Real estate agents and several economists say the Baltimore region is catching up with the rest of the nation in terms of its housing values. Prices have risen by double digits during the past two years, but those observers point to the early 1990s, when prices grew at 1 percent or 2 percent a year. Because the area has so many nearly slump-proof federal government jobs, the area's economy is more stable than others, they say, meaning demand for housing isn't likely to wane.

Baker, co-director of the liberal think tank, predicts that a bubble burst would result in a loss of up to $4 trillion in housing wealth. That may be only half of the $8 trillion of losses that resulted from the recent stock market bubble, but Baker says that while stock wealth was "overwhelmingly skewed" toward the richest 1 percent to 10 percent, housing is spread out among all classes of people.

Others reject any comparisons to the stock market because homes are not bought and sold the same way. They add that stock values can rise and fall almost immediately while housing prices - even if stagnant - do not fall as quickly.

Duncan and others in the housing industry said the housing boom has been driven by "economic fundamentals," rather than irrational exuberance on the part of consumers. Low interest rates and short supply have caused the bump in prices, and although income has not quite kept pace with the housing market, Duncan is confident that it will catch up.

Nationally, home prices rose 7.5 percent last year and the National Association of Realtors predicts price appreciation will reach 4.7 percent this year.

But Baker noted that home prices were not merely keeping in step with inflation. For example, since 1995, the Consumer Price Index has increased 21 percent, a figure that includes housing prices. The government's national housing price index increased 52 percent during the same period.

Another key indicator, Baker said, is the rental market.

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