This article was published on: 08/01/2003
FRONT LINES: Economy
To find current economic data, including metropolitan home prices, visit the Research section of REALTOR.org.
Solid footing for prices
BY DAVID LEREAH
The way some analysts keep looking for signs of a housing bubble, they must believe the laws of supply and demand have been revoked.
But, a healthy housing market and rising home prices aren’t incompatible. The fact that we continue to see healthy home sales and price appreciation even as the broader economy remains sluggish is in line with market dynamics.
Indeed, the supply-and-demand picture is the link analysts miss when they prophesy that home-price increases, like stock market price increases, will end in a bust. There are no signs on a nationwide basis of home prices bursting, let alone declining, anytime soon. As it is, home prices continue to climb, not decline.
In the first quarter of this year, 31 metro areas showed double-digit annual increases in median existing-home prices (from a year earlier), while eight posted small drops, NAR figures show. On a nationwide basis, prices through the first quarter of 2003 have risen 6.8 percent—a healthy, sustainable level.
Historically, home prices on a year-over-year basis haven’t declined nationwide since the Great Depression. The closest we’ve come to an across-the-board decrease since then was in 1989, when home prices grew by a scant 0.5 percent. That was at a time when housing markets were contracting, because of recession, and supply exceeded demand. Then, the inventory of homes represented a 9-month supply. Compare that to today’s supply, which in mid-2003 stood at a relatively lean 4.7-month inventory.
Of course, some of our major metropolitan areas, including Long Island, San Diego, San Francisco, and Washington, D.C., are experiencing healthy home price increases because of supply problems. The ratio of new jobs to new homes in these areas is quite high and far exceeds the 1.6 ratio for the country as a whole. Something has to give when demand exceeds supply like this, and it’s usually price.
But there are other fundamental strengths to the housing market that support continued price gains:
