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The Telephone Doctor: "Hi. How are you?" and other weak, wimpy words

Apr 27, 2006

The Appraiser's Perspective: More expensive, yet more affordableCharlie W. Elliott Jr., MAI, SRAhome prices, inflation, cost of building homes A sure sign that we're in a new year is that a lot of study results are coming our way. Primarily, these are conclusions of studies that had been conducted the previous year. Three of them appear to be particularly interesting: 1. A National Association of Home Builders (NAHB) study revealed that the cost of building homes increased dramatically last year; 2. A National Association of Realtors (NAR) study concluded that the U.S. median home price rose a whopping 13.6 percent in 2005; and 3. A report published by Moody's indicated that housing in the United States has actually become more affordable as a whole. Now, the conclusions of the first study on the above list certainly blend in with the conclusions of the second study. However, the results of the third study seem rather contradictory to the first two in light of the reports generated from the first two studies. How can that be? In order to try to find an answer to this question, we need to take a closer look at the above three reports. The NAHB report concluded that prices of building materials increased by about 10 percent last year. Hurricane Katrina and her evil sister Rita caused a spike in the costs of concrete, PVC pipe and other products, which led to building materials overall going up in double figures. Higher interest rates and energy costs also contributed to the increasing home building costs. The NAR study showed that home prices are going up accordingly. It must be pointed out that the 13.6 percent figure is the median, not the average. What this means is that half of the homes went up by more than 13.6 percent and the other half rose in price by less than 13.6 percent, not counting the few that actually rose by exactly 13.6 percent. At press time, the Office of Federal Housing and Enterprise Oversight (OFHEO) released a report that stated that the average U.S. home value increased by 12.95 percent in 2005. The OFHEO also noted that other goods rose by only 4.3 percent last year. While expenses (in this case, building costs) are a key factor in pricing, it's fair to say that the law of supply and demand takes center stage in real estate pricing. Demand has really skyrocketed in the greater Washington, D.C. area, as well as in several states, including California, Arizona and Florida. It's also important to note that this same study showed that price increases actually cooled down a bit during the fourth quarter of 2005 and that David Lereah, NAR's chief economist, predicts that this trend will continue. Now, let's move on to the Moody's study. It concluded that housing is more affordable in this country. The report on Moody's Web site,, determined that the percentage of a typical American family's income that was needed for mortgage payments was 30 percent in 1982. By 2005, that figure had dropped to 22 percent. So the fact that houses as well as building materials have seen significant increases has not led to an adverse effect on housing affordability. The study gives three explanations of that in its conclusion: low interest rates, higher incomes and more housing. As previously stated at the beginning of this column, those studies were about last year. As businessmen and businesswomen, our concern is now about this year and beyond. So let's take a look at those reasons and see if we can continue to count on them. The lowering of the interest rates earlier in the millennium was a godsend to our businesses and the economy as a whole. Housing, construction, real estate and the financing of this activity truly drove the economy during troubled times in the wake of Sept. 11. Now, interest rates are creeping back up, but some economists have predicted that these increases will end after this month. If interest rates hold from here on out, they will remain historically low. Rising incomes are not quite such a sure thing. The U.S. economy has lost a lot of manufacturing jobs in recent years. Meanwhile, most of the new jobs created are coming from the service sector, and these jobs typically do not pay as much. Many employers are increasing wages and salaries to keep up with inflation, but the changing of the guard from the manufacturing sector to the service sector is a bit unsettling. The new construction going on is encouraging. We have seen a lot of construction draw inspections in our business and yet another study, this one by the U.S. Department of Commerce, reported that this past January saw home building activity churning along at a record pace. The report said that the construction of new homes and apartments was 14.5 percent higher in January than it had been in December. Construction was at a seasonally adjusted annual rate of 2.276 million units, which makes it the highest construction rate since March 1973. Single-family home construction rose 12.8 percent to 1.819 million units - the highest ever - and multi-family units went up 21.9 percent to 457,000 units. And there's more - the issuance of building permits in January was an impressive 2,217 units. Since building permits are not affected by the weather, I look at this as a sign that home building will be strong throughout 2006. I would be remiss by failing to mention that the Moody's study did point out that housing affordability is definitely not guaranteed throughout the country. In parts of California and New York, as well as in the Boston and Chicago areas, the percentage of family income required to pay home mortgages currently exceeds 40 percent. It is in areas like these where construction should be at its fastest pace. This should improve the affordability issues in such places. In conclusion, we all have a lot at stake when it comes to the housing in this country. Lenders, builders, real estate agents, appraisers, suppliers and homeowners, not to mention those catching a ride on the waves in other businesses, are all stakeholders. While there is not yet any substantial proof of a housing recession, I plan to approach the housing market in my business with cautious optimism and suggest that you do so also. Charlie W. Elliott Jr., MAI, SRA is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, [email protected] or through the company's Web site at Previous columns he has written for The Mortgage Press can be seen on the Elliott & Company Web site.
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