Smart Money magazine recently had an interview with David Lereah who is the chief economist for the National Association of Realtors. Bubble Meter was not actually interviewed. Here are the questions and answers:
Smart Money: This week you said that we might be near a peak in the real-estate market. Should people be worried about the price of their homes?
Lereah: "'I've been saying that for two, three years now: That we're finally at a peak for home sales. And we continue to be wrong. We do think right now we may be at a peak, and that home sales should come down a bit as mortgage rates continue to rise."
Bubble Meter: "You did not properly answer the question. The question was about the price of a home, and not about the number of home sales. Or maybe you meant home prices when you said home sale. Either way you need to be clearer. That being said I think those who live in the bubble markets and can comfortably make the payments and have a desire to live in their house for the long run do not need to worry about price declines. People who are overextended on their (owner occupied) home mortgage need to be concerned. Those who are investors, speculators and are renting out their property at a loss so they can gain price appreciation need to worry. There will be price declines in the bubble locales."
"Do you think the real-estate market will still be able to provide a sound investment?"
Lereah: "Real estate is still a great investment opportunity for households. Price appreciation will continue. It may not be at 20%. It may be at 10% to 15%, or may even go down to 5%. The returns are still going to be good, but not as great as they have been. Real estate should still be extremely competitive [in terms of] return on investment. You don't need a 20% price appreciation to do well. You could still have price appreciation of 10% and beat most stocks. I think for the remaining years of this decade real estate will still be a good investment.
I think real estate is still a very attractive investment — to buy or to live in. I think price appreciation will continue. I don't think there will be a price-appreciation pop. It's not going to be nationwide. The fundamentals are there. The demography trends and population trends are there. It's a once-in-a-generation opportunity.
Bubble Meter: "There will be opportunities in certain locations. But, in the bubble markets the peak has either been reached or is coming shortly. I would not invest in the bubble markets right now. The bubble markets include Miami, LA, San Diego, San Francisco, Bakersfield, Seattle, Phoenix, NYC, Boston and many others locales.”
Smart Money: I'm assuming you don't believe in the existence of a housing bubble.
Lereah: No, I don't think there is one. You may see some air come out of some of those balloons. It might go from 20% appreciation to 5%. Housing [price appreciation], historically, is between 3% and 6% [annually] — somewhere in that range. So if you can do better than 6%, you're doing great. Even 5% is still very good.
BubbleMeter: "Yes there is definitely a housing bubble in the bubble markets. The bubble markets include many of the major cities. You can expect price declines in these markets. "
Smart Money: What if people interested in investing in real estate come to expect 20%-plus price appreciation on their homes, and won't be willing to settle for just 5%?
Lereah: I think that we'll probably knock out a certain percentage of investors. But the ones who remain will do very well. Remember, a 5% price appreciation gives you a lot bigger return than 5% because you're buying real estate on margin. You're giving a down payment. Say you put down $10,000 on a $100,000 house. If it increases by 10%, you get $10,000. That's a 100% return.
Bubble Meter: "Mr. Lereah is totally ignoring the carrying costs. On recent investor purchases, in the bubble markets the rent is not covering the mortgage, taxes and maintenance costs. Thus each month, you are losing money on your investment. Will you be able to make it based upon future price appreciation? Nope. Price declines are expected in the bubble markets."
Smart Money: If a peak, in your opinion, is close at hand, should investors stay away from real estate?
Lereah: There's still momentum. It's still a very healthy market with a lot of demand. It looks like if interest rates continue to go up maybe we've hit a peak in terms of home sales. We do expect the Fed to continue to raise rates a quarter percent each time. Each time they do that, mortgage rates will get a little bit higher. But again we're still going to be at healthy levels.