For Immediate Release
October 13, 2005
Contact: Susan Miller
317-816-9760
smiller@hickmanassociates.com NFI at Indiana State University Presents Inaugural Financial Forum
Economists discuss nation’s housing market and its impact on economy
(October 13, 2005, Indianapolis, Ind.) – Leading economists say that the nation’s vigorous housing market is not likely to experience the “bubble burst” that plagued the technology industry in 2000. A panel of monetary experts including Michael Bordo, Director of the Center for Monetary and Financial History at Rutgers University; Jonathan McCarthy, Senior Economist with the Federal Reserve Bank of New York and Amy Crews Cutts, Deputy Chief Economist, Freddie Mac Corporation shared their perspectives on the state of housing and its impact on the U.S. economy during the inaugural Financial Forum Series, “Is Your Bubble About to Burst?,” presented by Networks Financial Institute at Indiana State University on October 12. Nationwide, housing has significantly outperformed other segments of the economy, growing at a much higher rate than inflation. Average U.S. home prices through the second quarter of 2005 appreciated 13.4%.This growth has broached speculation about what would happen to the economy if the housing market collapsed and the likelihood of such a collapse.
Housing: A history of stability in the U.S.
Panelists pointed out that while the strength of the U.S. housing sector has been subject to cyclical highs and lows, it has traditionally been an area of economic strength. The U.S. has experienced only one decline in housing value in the past century and that occurred during the Great Depression. Typically, busts in the housing market have been regionalized in nature following periods of tremendous growth such as the cotton boom, gold rush and Florida land boom. Jonathan McCarthy, Senior Economist with the Federal Reserve Bank of New York noted that the recent housing boom has been longer in duration and strength than in past periods with real housing prices rising 59% over the last 10 years. Annual home price increases have been largest in the Pacific region at 8.6% and New England at 7.7%, while the West South Central areas have seen price increases annually of about 4.4%. Michael Bordo Director of the Center for Monetary and Financial History at Rutgers University said that a housing bust would likely affect no more than 20% of the U.S. Beyond geographic amenities, regional housing markets differ significantly based on variables including the supply of land available for construction.
Housing: Somewhat less stable internationally
Dr. Bordo referenced a study of 14 developed nations where approximately 50 percent of housing booms were followed by busts. Most busts were not preceded by booms either. Nordic countries Finland and Norway experienced banking crises following a downfall in the housing market, but Bordo noted that these nations’ economies had also been heavily dependent upon the Soviet Union for exports and maintained highly regulated credit markets that could not withstand democratization. Japan also saw a 15-year decline in housing following the crash of its stock market, but again this was prolonged by poor monetary policy and the failure to resolve bank insolvency quickly. According to Bordo, the United States has had no record of a national housing bust.
Amy Crews Cutts, Deputy Chief Economist, Freddie Mac Corporation noted that the U.S. mortgage market is structured to protect homeowners and the economy. The U.S. is the only market outside of Denmark that offers a 30-year fixed-rate pre-payable mortgage. Crews Cutts noted, for example, that the United Kingdom offers mortgages at fixed rates for two years and then converts to adjustable rate mortgages.
What’s driving up home values?
While costs for labor and materials increase, economists pointed out that it is consumer preferences and attractive interest rates that have had the strongest effect on home prices. Consumers’ preference for larger homes with more amenities has impacted the cost of new homes.
Concurrently, interest rates that have dropped as much as 40 percent have made it possible for homeowners to afford much more home than they could afford in the higher rate era. Noting that interest rates have averaged 8.6 percent since 1971, Crews Cutts noted that consumers should not panic about a modest rise to 6.1 percent. She said that consumers’ buying habits will more likely be impacted by rising home heating and gasoline prices than by shifts in interest rates, speculating that rising gas prices may be fueling a trend toward moving closer to job centers and away from the suburbs.
Finally, high-profile areas such as San Francisco and Las Vegas are attracting booms in population growth and driving down the availability of housing. Jonathan McCarthy, Senior Economist with the Federal Reserve Bank of New York said that the significant increases in real estate values in many of these high-profile areas are overshadowing more affordable locations. The highest appreciation was seen in Naples/Marco Island, Florida; with an appreciation rate of 35.6% with the lowest appreciation being in Mansfield, Ohio at four percent and a median increase of 8.6% in Scranton-Wilkes Barre, Pennsylvania. Dr. McCarthy noted that 90 MSA’s reported home appreciation growth above the national average of 13.4% with 175 MSA’s reporting lower averge appreciation values.
Dr. McCarthy explained that housing remains a bargain, overall, with declines in interest rates and quality improvements fully accounting for the boom in prices over the past 10 years. In his view, evidence of a national bubble rests on very weak data that falls apart on closer inspection.
Still an affordable and conservative investment
While rising housing prices have impacted the affordability of homes, Crews Cutts said that it’s important to note that housing is still a very affordable investment with an affordability index of 100%. The index means that the median family income can afford to purchase 100% of the median priced home. Home equity remains the largest single asset of most families with far more families holding home equity than securities in the stock market.
Characterizing the differences between housing and technology, Crews Cutts referenced the speculative nature of technology stocks and the ease of online entry into the market. “In the late 1990’s investing in the stock market was seen by many as a variation on a lottery ticket,” she noted. Crews Cutts also reinforced the important “shelter dividend” that housing offers consumers.
The “Is Your Bubble About to Burst” discussion was the first in a series of Financial Forums presented by Networks Financial Institute at Indiana State University. Founded in 2003 with a grant from the Lilly Endowment, NFI strives to facilitate broad, collaborative thinking, dialogue and progress in the evolving financial services marketplace, concentrating on the areas of education, outreach and research. Networks Financial Institute at Indiana State University is headquartered in Indianapolis with offices in Washington, D.C. and on the campus of Indiana State, and with outreach internationally. NFI’s goal is to serve as a catalyst for change in the financial services industry.
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