Report warns of housing declines

13 markets identified where bubble could burst in the next two years

July 14, 2005|By John Handley | John Handley,CHICAGO TRIBUNE

CHICAGO - Forces from investor speculation to job losses could burst the housing bubble in some major U.S. markets in the next two years, according to research by a private mortgage insurance company reported in the latest edition of Kiplinger's Personal Finance magazine.

Kiplinger's detailed what it called the 13 riskiest housing markets in the United States in its August edition, which is due out Monday. The list was based on California-based PMI Group's index of risk that housing prices will fall in the next two years. Boston led the list with a 53 percent chance of such a price decline.

The surge in home prices is driven mostly by basic market forces, President Bush's top economist said Tuesday, and not by speculation. However, the boom is being closely watched, said Ben S. Bernanke, who is seen as a possible successor to Federal Reserve Chairman Alan Greenspan.

The report on risky markets, by Kiplinger's Dave Lindorff, said that in California a bursting bubble is threatened in Los Angeles, San Francisco and Sacramento, where 40 percent risks of decline are projected in the next two years.

Also on the riskiest list were Providence, R.I., with a 39 percent risk; Detroit, 38 percent; New York, 31 percent; Minneapolis-St. Paul, 25 percent; Denver, 21 percent; Washington, 19 percent; Fort Lauderdale, Fla., 19 percent; Miami, 18 percent; and Tampa-St. Petersburg, Fla., 14 percent.

Kiplinger's did not include Baltimore on its list of the riskiest housing markets, though Washington appeared. "Even a modest decline in government outlays could tip the housing market on its side," the magazine said.

The two markets are so increasingly intertwined that Baltimore could be affected by a Washington downturn, though some economists believe the Baltimore area's lower prices would act as a cushion. Homes are selling for $310,000 on average in the city and its suburbs, $200,000 less than in the nation's capital.

The reasons for housing price declines vary from city to city. They include job losses in Boston and Detroit, double-digit price increases and the possibility of increased housing supply in Los Angeles, baby boomers leaving town in New York, aggressive buying by investors in Fort Lauderdale, and a concentration of employers in the troubled telecom sector in Denver.

At present, though, Bernanke contends that housing fundamentals remain strong. They include low mortgage rates, rising employment and incomes, and a growing population.

"While speculative [buying and selling] appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom," Bernanke said in his first speech as the new chairman of the President's Council of Economic Advisers.

The Chicago Tribune is a Tribune Publishing newspaper. Sun staff writer Jamie Smith Hopkins contributed to this article.

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