Low Rates Buoy Industry

December 1, 1997

The factors that made 1997 one of the best years for real estate in U.S. history will continue to influence the economy next year, say industry economists.

“The reasons [for the 1997 boom] aren’t hard to find,” says David Berson, vice president and chief economist for Fannie Mae, Washington, D.C. “It’s been a great economic environment for buying homes: Affordability has been very high, inflation low, and consumer confidence very high because of a strong job market.”

David Lereah, chief economist for the Washington D.C.-based Mortgage Bankers Association of America, agrees. “We had record-setting consumer confidence, and that, combined with rising real wages, wealth gains, and the stock market, gave households the financial wherewithal to go out and buy big-ticket items--cars and homes.”

Both Berson and Lereah also point to baby boomers, low-income buyers, and immigrants as groups that have powered the housing market in 1997. They're expected to continue having a positive influence in 1998.

“We had favorable demographics, with boomers having a positive impact on repeat homebuying and trade-up homes,” says Lereah. “We've loosened underwriting, and you see a lot of 90 percent or greater loan-to-value loans on the books, which is a reflection of reaching out to lower-income buyers.”

Second-Time Buyers

Baby boomers are also fueling a renewed interest in more luxury properties and vacation homes.

Typically as you age, your interest in second homes goes up,” says Berson. “So now we have this huge group of people who are starting to become old enough to buy second homes.”

“You have a very healthy economy and a group of boomers entering their peak earning years,” says Lereah. “You're going to see a lot more second-home purchases.”

John Tuccillo, consulting economist for the National Association of REALTORS®, notes that you can’t ignore the stock market: “As the stock market rose and people got wealthier, you saw demand increase, particularly in places such as Chicago and New York, where people who were direct beneficiaries of the financial services industry were buying.”

Economists aren’t in agreement on whether this year's passage of capital gains tax relief will have a positive impact next year.

Berson points out that the new law will make it easier for people to move and buy in different areas of the country. Before the bill passed, “if you lived in San Francisco and had a job offer in Des Moines, Iowa, you might have thought twice about moving. Now it’s easier for people to move to places where home prices may not be as high. It also helps divorcing couples, both of whom would have had to buy a house of equal or greater value.”

“You may see some impact among the 45- to 55-year-olds who are looking to resize their housing based on changes in the family,” Tuccillo says. “Before, they were reluctant to buy a less expensive house because they weren’t eligible for an exemption. You'll start seeing some of them selling off properties. But for the nation as a whole, you probably won't see a significant impact.”

Lereah says the jury is still out on whether capital gains tax relief is favorable for the housing industry in the long run. “Now funds are free to move to any sector of the economy because there's no tax on the sale of homes. You could have a situation in which households will sell their home and rent an apartment for two or three years in a new city where they’ve been transferred. They could take gains from their home sale and invest in the stock market, where they could get higher returns.”

Expect Some Braking in ‘98

Can this boom last? No one’s predicting catastrophe, but economists see the economy slowing a bit.

“We've had two years in a row of almost ideal conditions, and maybe it’s too much to hope for a third,” Berson says. “We expect the economy to slow modestly, which means consumer confidence will probably come down some and inflation move up a bit. But none of those things will be so big as to cause the housing market a lot of indigestion.

“I think we’ll see an economy that’ll be growing a little bit slower,” Tuccillo agrees. But he adds, “The basic economy will still be good, we’ll be producing jobs, and we’ll still be growing. Inflation will be relatively low, and so too interest rates.”

1998 Outlook

  • The economy will slow.
  • There'll be a continued focus on vacation homes and luxury properties and amenities on the part of baby boomers.
  • More minorities will enter the housing market.
  • According to the Washington, D.C.-based Mortgage Bankers Association of America, the markets that will perform the best will be Las Vegas, Phoenix, Atlanta, Portland, Ore., and Dallas.
  • October's stock market volatility won't have a long-term impact. Low interest and unemployment rates, as well as demographic demands, drive the real estate market, according to NAR analysts.

Boomers' Refrain: Be Good to Yourself

You've probably read about or experienced buyers’ renewed interest in luxury amenities and second homes. Here's what a few of your colleagues are saying:

Naples and Florida's east coast have been extremely strong markets for second homes--very expensive second homes. The average sales price at our Naples Fifth Avenue office is more than $1 million. The buyers aren’t doctors and lawyers--the ones that used to drive this market. They're mostly entrepreneurs and executives. We're also seeing a strong move-up market that’s being driven by the baby boomers.--Richard Cope, chairman and CEO, The Prudential Florida Realty, Clearwater, Fla.

There's more disposable cash out there, and we’re seeing the oldest baby boomers looking for luxury and second homes. The attitude is “Be good to yourself. You've earned it, you deserve it, and if you don’t do it now, when will you?”--Dorcas Helfant, broker-owner, Coldwell Banker--Helfant, Virginia Beach, Va.

We're experiencing the best year in 24 years. The baby boomers are here in greater numbers, and they’re bullish on the economy. We've seen the median age drop from the mid-50s to the 48- to 51-year-old range.--Chuck Houseman, senior sales executive, Litchfield Company of South Carolina, Pawleys Island, S.C.

Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.

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