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ABC Special Report
Investigation: New Home Heartbreak
Trump - NAHB Homebuilders Shoddy Construction and Forced Arbitration
Foreclosures High-The housing bubble is bound to pop
Sunday, 08 May 2005
Economist frets over bubble
If prices go poof across the nation, area will feel pain

So when's it going to happen?  University of Houston economics professor Barton Smith believes the bubble is bound to pop,... But ominous signs are looming, Smith said. Foreclosures, for example, are as high today as they were in 1991. And builders in Houston are putting up single-family homes faster than they can be sold. In the past year, 42,000 single-family home permits were issued, but the area gained only 15,000 households. Related article: Prices flat here as housing in U.S. booms
Economist frets over bubble
If prices go poof across the nation, area will feel pain

By L.M. SIXEL
May 5, 2005 Copyright 2005 Houston Chronicle

RESOURCES
 
UNEVEN GROWTH

Houston percentage job growth by sector for the past 12 months.
Mining: 4.57%
Services: 2.15
Government: 1.21
Finance: 0.22
Construction: -3.36
Non-durable manufacturing: -4.22

Source: U.S. Bureau of Labor Statistics; U.H. Institute for Regional Forecasting
PRICEY BUBBLE

Percent gain in home prices for selected cities, 2003 to 2004.
Las Vegas: 47%
Washington, D.C.: 27
Miami: 26
San Diego: 25
Spokane: 24
Norfolk: 21
Phoenix: 18

Source: Coldwell Banker; U.H. Institute for Regional Forecasting

So when's it going to happen?

People across the nation continue to buy houses at highly inflated prices, even though economists have warned for months that the bubble's going to burst.

But it hasn't.

University of Houston economics professor Barton Smith believes the bubble is bound to pop, but the severity and timing depend on how long and how high the Federal Reserve keeps raising interest rates.

There's another big unknown looming, said Smith, who presented his annual real estate symposium on Thursday to more than 1,000 real estate developers, bankers and other business leaders.

"It's psychological, it's psychological," he said.

At some point, people are going to realize that the gains of 10 to 20 percent a year aren't sustainable, he said. In 2004, for example, average home prices increased 47 percent in Las Vegas, 27 percent in Washington, D.C., and 25 percent in Miami.

When the realization strikes, prices will start to fall. A dip of only 20 to 25 percent in cities just on the East and West coasts could end up creating a nationwide recession. And that would hurt even affordable-housing cities like Houston that are closely tied into the national economy.

"The Fed has to try to take the gusto out of the market without creaming it," Smith said.

On Tuesday, in its eighth consecutive quarter-point hike, the Fed raised interest rates to 3 percent. It takes three quarters before the economy begins to feel the effect of a rate change.

Despite rising interest rates, there's been no shortage of buyers. Smith attributes that to a last-minute rush to buy. Consumers are hearing about interest rates rising so they figure they'd better lock in, he said.

Fortunately, Houston's market isn't overpriced compared to the rest of the nation. For a four-bedroom, two-and-a-half-bath house, it costs on average $79 a square foot in Houston, compared with the national average of $117.

Area employers are adding jobs faster than they did a year ago, though manufacturing and construction will continue to be weak spots. Assuming employers will keep their January-to-April hiring pace going for the entire year, Houston should end 2005 with an extra 33,000 jobs, a 1.6 percent increase.

But ominous signs are looming, Smith said. Foreclosures, for example, are as high today as they were in 1991. And builders in Houston are putting up single-family homes faster than they can be sold.

In the past year, 42,000 single-family home permits were issued, but the area gained only 15,000 households.

"It's an environment in which builders should be cautious," Smith said. Developers have been focusing lately on starter homes, which sell for $80,000 to $160,000.

But that will be the weakest part of the market because those lower-priced homes are most sensitive to interest rate hikes, he said.

Not only are developers overbuilding, but they are building the wrong houses, Smith said.

When the economy improves and people start moving to Houston with money from selling their costly houses on the West or East coasts, they'll be looking for upscale properties, not starter homes.

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