July 25, 2005
Debunking the bubble | The market's cruising, but experts say talk of a housing bubble in Portland is just hot air
By Taylor Smith
If you own a home in the greater Portland area, chances are you've made mental calculations about how much more your house is worth these days. Or, if you're among those people hoping to own a house, you've probably groused about rising real estate prices, bemoaning the lack of good deals in the area.
After all, the greater Portland area has experienced some of the most dramatic price increases in the country: In the five years through March, the median home price has risen by 70%, eclipsing gains in larger cities like Philadelphia and Phoenix. The median house price for Cumberland County reached $250,000 in May, according to Maine Real Estate Information Service Inc., a 12-month increase of 13.6%. And in some pockets of Cumberland County, a quarter million dollars won't buy much more than a two-bedroom, one-bath fixer-upper.
Real estate watchers increasingly are wondering what the heck's going on with the area's housing market. Since the mid-1990s, real estate in the Portland area has gone nowhere but up. It climbed along with the dot-com bubble ˆ and kept climbing after the Nasdaq crashed. House prices continued to rise despite a heavy economic recession and the war in Iraq, and they're still posting gains. And home price increases have been far outstripping any gains in per capita income, making it increasingly difficult for the average person to enter the real estate market in the Portland area. "The affordability question has been rearing its head in the Portland market, and it continues to be an issue," says Valarie Lamont, director of the Center for Real Estate Education at the University of Southern Maine in Portland.
Experts agree that prices eventually will slow down, but they're not sure whether that will happen in the next few months or the next few years. More important than when they'll slow, however, is the question of how the prices will settle in line with historical averages. Rather than claiming the existence of a real estate bubble in the Portland area, experts instead argue that housing prices have just been on an extended cyclical upswing since the mid-90s. At some point, they say, the cycle will run its course and prices will drift back to more sustainable levels without the sturm und drang of a market collapse.
And even though some buyers would doubtless love to see housing prices come back to earth with a tremendous clatter, a slower market correction is much better news. According to Dan Jester, a real estate economist with Philadelphia research firm Economy.com, the bursting of an area's housing bubble "almost always leads to recession in that area."
Of course, the question of whether a real estate bubble exists isn't unique to the Portland area. Headlines in newspapers across the country have asked the same thing in recent months. According to a recent report from the Joint Center for Housing Studies at Harvard University in Cambridge, Mass., housing prices across the country have been on a 13-year tear. The center in June released its 2005 State of the Nation's Housing report, which notes that house prices, residential investment and home sales each hit record levels last year.
Meanwhile, the U.S. homeownership rate last year reached an all-time high. "This is a little bit of uncharted territory," says JCHS Director Nicolas Retsinas, noting that the next-longest period for uninterrupted growth in the national housing market since 1970 lasted just five years.
No froth, just peaks and valleys
According to Mike McNamara, president of Portland-based TD Banknorth's Maine operations, the largest factor that's contributed to the growth of the regional ˆ and national ˆ housing market is the rock-bottom interest rates put in place since 2001 by the Federal Reserve Board. The falling rates effectively slashed the cost of borrowing money, allowing prospective buyers the opportunity to lock in cheap mortgages. For example, the interest rate on a 30-year fixed-rate mortgage in January 2001 stood at 7.3%, according to HSH Associates, a Pompton Plains, N.J.-based data-tracking firm. In June of this year, that rate dropped to 5.77%, which reduced the monthly payment on a $200,000 mortgage by 15% a month.
As a result, a crush of people have waded into the housing market. Last year alone saw more than one million new homeowners, according to the JCHS housing report, and the U.S. homeownership rate reached a record 69%. McNamara notes that even though the Fed has raised short-term interest rates in recent months, longer-term rates that affect mortgages haven't risen significantly.
In Maine, the story is the same. Low interest rates have driven demand, and rising real estate prices have followed that demand. Maine housing sales rose nine percent last year while prices climbed 12%. In Cumberland County, the number of single-family homes sold continued to grow at a steady clip in 2004, rising 6.5%, while the median sales price grew by 12.5%.
And to compound the problem of rising prices, incomes in Cumberland County aren't growing nearly as quickly. According to the Maine Center for Economic Policy, Cumberland County incomes in 2003 ˆ the most recent annual data available ˆ grew less than four percent. That compares to a 13.9% rise in housing prices, according to MREIS.
But Retsinas notes that many other real estate markets in the United States are in much worse shape, with home price appreciation outstripping income gains by ratios of eight or nine to one. Dan Jester of Economy.com says that even though Portland's real estate market is growing quickly, it pales in comparison to many other areas around the country. "Every housing market will have peaks and valleys in home price growth, just like any other cyclical indicator in the economy," says Jester. "But we're seeing most of the froth in the housing market in places like Florida, California and New York City."
The Office of Federal Housing Enterprise Oversight's current rankings of the 25 fastest-growing real estate markets by metropolitan statistical area ˆ a measure used by the U.S. Census Bureau ˆ shows that 14 areas are in California and seven are in Florida. Naples, Fla., for example, has become one of the most expensive housing markets in the country thanks to a combination of booming employment and key demographic shifts, including an influx of baby-boomer retirees and strong migration from Latin America. According to the Florida Association of Realtors, the median home price in Naples in May reached $488,900. And OFHEO statistics note that during the 12 months through March, home prices in the Naples and Marco Island, Fla. MSA increased by more than 23%.
The situation in Naples suggests to Jester that there's a potential overvaluation problem, and that real estate prices are approaching dangerous levels. Compared to white-hot markets like Naples, Portland isn't too bad off, he says. Though the Portland price growth of 14% during the 12 months through March is high, Jester points out that the average year-over-year home price growth since 1995 is closer to seven percent, which offers a better view of the market than a one-year snapshot. "It takes into account ebbs and flows of the business cycle," he says. "Seven percent growth for a 10-year average strikes me as sustainable."
"Mortgage your property wisely"
Pat Amidon agrees with Jester's take on the market. As president of Amidon Appraisal in Portland, she's spent 20-plus years evaluating the real estate market in the Portland area. While Amidon says it isn't yet clear if the Portland market is in a bubble, she's more apt to believe that real estate prices are on a cyclical upswing rather than on an unhealthy climb. "It's called a cycle for a reason," she says. "The length of a cycle is unpredictable."
Amidon says that although she wishes that property appreciation would drop to a level closer to inflation (which in May stood at 2.8%), she doesn't expect to see a wholesale cooling of the real estate market. The reason, she says, is that demand remains high, driven in part by the baby-boomer retirees who have spurred much of the growth in Florida. And this time, Amidon says the market will fare much better than it did in the early 90s because the run-up in prices hasn't been as wild. After coming out of the recession in the early 1980s ˆ when falling interest rates finally reduced mortgage rates from double-digit levels ˆ Amidon says pent-up demand for housing made the market grow like gangbusters. "We got intoxicated by the fact that properties were appreciating at 25% a year," she says. "That intoxication left us with a pretty big hangover when the demand dropped off."
As a testament to her belief in the health of the current market, Amidon recently reserved four units in the Waterview development, a 94-unit condo project proposed earlier this year by Jeff Cohen, who also owns the Time and Temperature Building on Congress Street. Amidon expects that the units, which cost more than $300,000 apiece, will be attractive to boomers because of their central location. "I would love to move downtown and be able to walk to restaurants, to work, to cultural events and things like that," she says. "I don't anticipate [demand] falling off because there are a lot of us that want those services. I may be crying in my soup two years from now, but I don't think I will be."
While the Portland market may be healthier than many people think, Amidon warns that homeowners still need to be mindful that high housing prices and the threat of higher interest rates can create a dangerous financial situation. To that end, she recommends that owners of investment properties such as apartment buildings be prepared for an increase in vacancy rates. And Amidon says homeowners should avoid overextending themselves with out-of-reach mortgage payments or borrowing plans that will change significantly as interest rates move higher. "What is most important for a property owner is that they mortgage their property wisely," she says.
That's good advice, according to many experts. During the past few years, more homeowners have been attracted to new types of borrowing instruments such as interest-only loans. With such a loan, borrowers pay only the interest on the loan for a period typically between three and seven years, making the monthly payments much lower than those on a 30-year fixed-rate mortgage, which requires payments on both interest and principal. The product allows buyers to qualify for larger loans and reduce their monthly payments. But many experts argue that those homeowners can be burned if housing prices begin to fall, and that some won't be able to handle the added expense of paying down the principal when the interest-only period ends.
LoanPerformance, a San Francisco-based mortgage research firm, estimates that 30% of all new mortgages last year were interest-only loans, up from 13% in 2003. Maine still trails the national average, but the popularity of such loans has increased significantly in Portland, rising from just three percent to 15% of all new mortgages in 2004. "It's a lot of people stretching to buy homes that they really shouldn't be buying," says Jester. "When you take out loans that you only have to pay the interest on, that's bad news if the interest rates suddenly increase. Even a one-quarter percentage point increase could send some households down the wrong road."
After all, the greater Portland area has experienced some of the most dramatic price increases in the country: In the five years through March, the median home price has risen by 70%, eclipsing gains in larger cities like Philadelphia and Phoenix. The median house price for Cumberland County reached $250,000 in May, according to Maine Real Estate Information Service Inc., a 12-month increase of 13.6%. And in some pockets of Cumberland County, a quarter million dollars won't buy much more than a two-bedroom, one-bath fixer-upper.
Real estate watchers increasingly are wondering what the heck's going on with the area's housing market. Since the mid-1990s, real estate in the Portland area has gone nowhere but up. It climbed along with the dot-com bubble ˆ and kept climbing after the Nasdaq crashed. House prices continued to rise despite a heavy economic recession and the war in Iraq, and they're still posting gains. And home price increases have been far outstripping any gains in per capita income, making it increasingly difficult for the average person to enter the real estate market in the Portland area. "The affordability question has been rearing its head in the Portland market, and it continues to be an issue," says Valarie Lamont, director of the Center for Real Estate Education at the University of Southern Maine in Portland.
Experts agree that prices eventually will slow down, but they're not sure whether that will happen in the next few months or the next few years. More important than when they'll slow, however, is the question of how the prices will settle in line with historical averages. Rather than claiming the existence of a real estate bubble in the Portland area, experts instead argue that housing prices have just been on an extended cyclical upswing since the mid-90s. At some point, they say, the cycle will run its course and prices will drift back to more sustainable levels without the sturm und drang of a market collapse.
And even though some buyers would doubtless love to see housing prices come back to earth with a tremendous clatter, a slower market correction is much better news. According to Dan Jester, a real estate economist with Philadelphia research firm Economy.com, the bursting of an area's housing bubble "almost always leads to recession in that area."
Of course, the question of whether a real estate bubble exists isn't unique to the Portland area. Headlines in newspapers across the country have asked the same thing in recent months. According to a recent report from the Joint Center for Housing Studies at Harvard University in Cambridge, Mass., housing prices across the country have been on a 13-year tear. The center in June released its 2005 State of the Nation's Housing report, which notes that house prices, residential investment and home sales each hit record levels last year.
Meanwhile, the U.S. homeownership rate last year reached an all-time high. "This is a little bit of uncharted territory," says JCHS Director Nicolas Retsinas, noting that the next-longest period for uninterrupted growth in the national housing market since 1970 lasted just five years.
No froth, just peaks and valleys
According to Mike McNamara, president of Portland-based TD Banknorth's Maine operations, the largest factor that's contributed to the growth of the regional ˆ and national ˆ housing market is the rock-bottom interest rates put in place since 2001 by the Federal Reserve Board. The falling rates effectively slashed the cost of borrowing money, allowing prospective buyers the opportunity to lock in cheap mortgages. For example, the interest rate on a 30-year fixed-rate mortgage in January 2001 stood at 7.3%, according to HSH Associates, a Pompton Plains, N.J.-based data-tracking firm. In June of this year, that rate dropped to 5.77%, which reduced the monthly payment on a $200,000 mortgage by 15% a month.
As a result, a crush of people have waded into the housing market. Last year alone saw more than one million new homeowners, according to the JCHS housing report, and the U.S. homeownership rate reached a record 69%. McNamara notes that even though the Fed has raised short-term interest rates in recent months, longer-term rates that affect mortgages haven't risen significantly.
In Maine, the story is the same. Low interest rates have driven demand, and rising real estate prices have followed that demand. Maine housing sales rose nine percent last year while prices climbed 12%. In Cumberland County, the number of single-family homes sold continued to grow at a steady clip in 2004, rising 6.5%, while the median sales price grew by 12.5%.
And to compound the problem of rising prices, incomes in Cumberland County aren't growing nearly as quickly. According to the Maine Center for Economic Policy, Cumberland County incomes in 2003 ˆ the most recent annual data available ˆ grew less than four percent. That compares to a 13.9% rise in housing prices, according to MREIS.
But Retsinas notes that many other real estate markets in the United States are in much worse shape, with home price appreciation outstripping income gains by ratios of eight or nine to one. Dan Jester of Economy.com says that even though Portland's real estate market is growing quickly, it pales in comparison to many other areas around the country. "Every housing market will have peaks and valleys in home price growth, just like any other cyclical indicator in the economy," says Jester. "But we're seeing most of the froth in the housing market in places like Florida, California and New York City."
The Office of Federal Housing Enterprise Oversight's current rankings of the 25 fastest-growing real estate markets by metropolitan statistical area ˆ a measure used by the U.S. Census Bureau ˆ shows that 14 areas are in California and seven are in Florida. Naples, Fla., for example, has become one of the most expensive housing markets in the country thanks to a combination of booming employment and key demographic shifts, including an influx of baby-boomer retirees and strong migration from Latin America. According to the Florida Association of Realtors, the median home price in Naples in May reached $488,900. And OFHEO statistics note that during the 12 months through March, home prices in the Naples and Marco Island, Fla. MSA increased by more than 23%.
The situation in Naples suggests to Jester that there's a potential overvaluation problem, and that real estate prices are approaching dangerous levels. Compared to white-hot markets like Naples, Portland isn't too bad off, he says. Though the Portland price growth of 14% during the 12 months through March is high, Jester points out that the average year-over-year home price growth since 1995 is closer to seven percent, which offers a better view of the market than a one-year snapshot. "It takes into account ebbs and flows of the business cycle," he says. "Seven percent growth for a 10-year average strikes me as sustainable."
"Mortgage your property wisely"
Pat Amidon agrees with Jester's take on the market. As president of Amidon Appraisal in Portland, she's spent 20-plus years evaluating the real estate market in the Portland area. While Amidon says it isn't yet clear if the Portland market is in a bubble, she's more apt to believe that real estate prices are on a cyclical upswing rather than on an unhealthy climb. "It's called a cycle for a reason," she says. "The length of a cycle is unpredictable."
Amidon says that although she wishes that property appreciation would drop to a level closer to inflation (which in May stood at 2.8%), she doesn't expect to see a wholesale cooling of the real estate market. The reason, she says, is that demand remains high, driven in part by the baby-boomer retirees who have spurred much of the growth in Florida. And this time, Amidon says the market will fare much better than it did in the early 90s because the run-up in prices hasn't been as wild. After coming out of the recession in the early 1980s ˆ when falling interest rates finally reduced mortgage rates from double-digit levels ˆ Amidon says pent-up demand for housing made the market grow like gangbusters. "We got intoxicated by the fact that properties were appreciating at 25% a year," she says. "That intoxication left us with a pretty big hangover when the demand dropped off."
As a testament to her belief in the health of the current market, Amidon recently reserved four units in the Waterview development, a 94-unit condo project proposed earlier this year by Jeff Cohen, who also owns the Time and Temperature Building on Congress Street. Amidon expects that the units, which cost more than $300,000 apiece, will be attractive to boomers because of their central location. "I would love to move downtown and be able to walk to restaurants, to work, to cultural events and things like that," she says. "I don't anticipate [demand] falling off because there are a lot of us that want those services. I may be crying in my soup two years from now, but I don't think I will be."
While the Portland market may be healthier than many people think, Amidon warns that homeowners still need to be mindful that high housing prices and the threat of higher interest rates can create a dangerous financial situation. To that end, she recommends that owners of investment properties such as apartment buildings be prepared for an increase in vacancy rates. And Amidon says homeowners should avoid overextending themselves with out-of-reach mortgage payments or borrowing plans that will change significantly as interest rates move higher. "What is most important for a property owner is that they mortgage their property wisely," she says.
That's good advice, according to many experts. During the past few years, more homeowners have been attracted to new types of borrowing instruments such as interest-only loans. With such a loan, borrowers pay only the interest on the loan for a period typically between three and seven years, making the monthly payments much lower than those on a 30-year fixed-rate mortgage, which requires payments on both interest and principal. The product allows buyers to qualify for larger loans and reduce their monthly payments. But many experts argue that those homeowners can be burned if housing prices begin to fall, and that some won't be able to handle the added expense of paying down the principal when the interest-only period ends.
LoanPerformance, a San Francisco-based mortgage research firm, estimates that 30% of all new mortgages last year were interest-only loans, up from 13% in 2003. Maine still trails the national average, but the popularity of such loans has increased significantly in Portland, rising from just three percent to 15% of all new mortgages in 2004. "It's a lot of people stretching to buy homes that they really shouldn't be buying," says Jester. "When you take out loans that you only have to pay the interest on, that's bad news if the interest rates suddenly increase. Even a one-quarter percentage point increase could send some households down the wrong road."
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