The number of existing single-family homes sold in May jumped to a record-high level, up nearly 6% (5.7%) in a year's time. And, according to the National Association of Realtors, an industry trade group, the median price of a home jumped 15%, the strongest year-to-year price appreciation in 25 years.
David Lereah is the chief economist for the National Association of Realtors. He says "baby-boomers", the generation that began in the years after World War Two, are now making plans for retirement. The supply of homes, says Mr. Lereah, is not keeping pace with demand. He says, "It is the biggest generation the country has ever had. They are in their peak earning years. They have a lot of built up equity in their primary residences, so they are buying homes at a record-setting pace, not just buying primary homes but second homes, vacation homes and homes for investment. So when demand exceeds supply, something has to give, and that is prices."
According to the National Association of Realtors, the median price nationwide of single-family home is now $206,000, but in some areas prices are much higher. For example, in California the median price is over $500,000.
Richard Brown is Chief Economist for the Federal Deposit Insurance Corporation, or F.D.I.C., which oversees the private banks that provide most of the home loans in the U.S. Mr. Brown says the hottest housing markets can be found in three regions of the country, all of which, he says, are desirable retirement areas.
Mr. Brown says, "The fact that the boom markets are concentrated in California, the
Northeast and in Florida is not surprising in a sense that coastal markets with supply constraints, where it is difficult to increase housing supply, tend to have more volatile home prices than the middle of the country."
Some economists worry that speculative investment has created an unsustainable boom similar to what happened 10 years ago in the stock market.
Amy Crews-Cutts is an economist with Freddie Mac, the congressionally chartered organization that provides money to mortgage lenders. She dismisses concerns that the housing boom is headed for a crash.
According to Ms. Cutts, "Most people are buying these houses to live in them. They [home buyers] are not buying it just for the investment. Where house prices are growing rapidly, they are growing where people are moving in vast numbers; Washington, D.C., Florida, California, Las Vegas [Nevada] and cities like Boston and the New England area."
Housing is one of the main engines driving the American economy. In the latest revision of growth figures for the first three months of the year, housing made up roughly 20% of all U.S. economic activity. F.D.I.C. economist Richard Brown admits there are housing bubbles in a few areas of the country but he says a downturn in one will not necessarily mean a downturn in all.
"Something to remember in housing markets is that owner-occupants of homes do not tend to part with those homes at distressed prices," says Mr. Brown. "They go to extraordinary lengths to keep their home off the market. Clearly, we are seeing signs of speculative activity in some of the boom markets. That is one of the definitions of a boom market. But I think the telling factor, at least based on what history shows us, is going to be: what kind of local economic distress do we see in a market? If there is serious local economic distress, prices certainly could fall."
During the height of the stock market bubble in the late 1990's, the nation's top
banker, Federal Reserve Board Chairman Alan Greenspan, was critical of what he termed the "irrational exuberance" on Wall Street because soaring stock prices bore little relation to underlying economic fundamentals. But Mr. Greenspan is widely credited with creating the conditions for today's rapid escalation in home sales and prices. To lessen the effects of a mild recession in 2000, the Federal Reserve cut interest rates 13 times to a record low 1%, which resulted in the lowest mortgage interest rates in 50 years. Although the Fed has raised interest rates 9 times in the past year, mortgage rates have largely been unaffected.
In fact, rates on a 30-year fixed-interest-rate mortgage, the most common type of home loan, are currently heading lower, according to economist David Lereah.
Mr. Leureah says, "This is not unusual but sometimes that portends recession, so we need to be careful going forward about economic conditions. I think the Fed needs to be very careful right now."
So far, the Federal Reserve Board, whose decisions on monetary policy affect interest rates on everything from credit cards to car loans to home mortgages seems reluctant to deflate the housing bubble. But most economists believe that unlike the rapid decline in stock prices five years ago, the national housing market is likely to cool gradually from its red hot pace of the last several years, sparing the U.S. economy and American homeowners, any major economic shocks.