No bust but fizz likely in housing

Economists say prices will stagnate with rise in mortgage rates


The nation's long housing boom will end not with a bang but in a prolonged period of whimpering as homeowners suffer through stagnant pricing that could last years.

That was the consensus of economists gathered in Chicago this week as they viewed the likelihood that a so-called housing bubble will end in a crash. Their conclusion: It won't.

But homeowners will no longer be able to use houses as piggybanks, cashing in on gains in appreciation periodically through low-cost refinancings. And many will be forced to hold onto a house or condominium for a long time as they wait for prices to rise.

The problem is that rising mortgage rates are putting an end to the easy money that underpinned increasing home prices, said Richard Brown, chief economist of the Federal Deposit Insurance Corp. in Washington.

"Price increases have far outstripped income growth for a long time, particularly in the last two years, but that period is coming to an end," he said.

The so-called golden age for mortgage lending is about over after lasting about 20 years, he said. "The end of the boom probably is not far away," Brown said. "It likely will lead to a long period of price stagnation but not technically a bust."

House prices have been artificially boosted recently by the lowest mortgage rates in three decades, and high-risk lending has fed the fires of home price inflation, according to Brown. Such lending involves interest-only mortgages or those that allow the buyer to set his own monthly payments, without paying down the principal.

Home prices "have been rising far more rapidly than rents for the last four years. This probably is what Federal Reserve Chairman Alan Greenspan meant when he pointed to froth in the housing market," said economist Richard Rosen of the Federal Reserve Bank of Chicago.

He said a huge drop in long-term mortgage rates since 1985, when they were about 12 percent, to historic lows near 5 percent "meant that you could afford more house for the same monthly payment."

Rosen compared the United States with Britain, where mortgage rates have been rising for about two years. Here, the uptick in rates began later.

"In Britain, if housing was a bubble, it didn't burst," he said. "When mortgage rates rise, prices flatten but they may not actually decrease."

One warning sign for the housing market, Rosen said, is that more and more owners are putting property on the market, and real estate is taking longer to sell.

"The risk is that if sales slow, there will be too much supply, creating price risk," Rosen said.

Meanwhile, there are few reports of multiple bidders seeking a given home.

The economists were brought together Wednesday by George Kaufman, a professor in Loyola University Chicago's Department of Finance, to answer the question: "Is there a housing bubble?" More than 220 people attended.

Economist Carl Tannenbaum of LaSalle Bank said predicting a real estate bubble "is very hazardous, because housing has been the strongest sector of the economy for an incredibly long period."

Even if sales were to slow, he said, there has been a huge amount of home remodeling, providing economic stimulus.

"Housing provides a strange hybrid of investment and consumer spending," he said.

While people have extracted about $600 billion from mortgage refinancings in the past year, "they still have about $10 trillion in home equity," Tannenbaum said. That provides a huge cushion against which they can borrow."

Tannenbaum said investors "should expect a correction, but not a crash" in the value of their homes.

Fresh concerns about the real estate market were raised yesterday when Toll Brothers Inc., a builder of luxury homes, reported that its fiscal fourth-quarter profit rose 72 percent, topping expectations, but said fiscal 2006 earnings could miss Wall Street estimates in a slowing housing market.

Chief Executive Officer Robert I. Toll said, "We believe demand for our luxury homes relies, in large measure, on consumer confidence, which has suffered recently among our clientele."

William Sluis writes for the Chicago Tribune.

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