Demographics steer housing destiny

January 21, 2003

Economists predict people trends, low interest rates

By Marcie Geffner
Inman News Features

Los Angeles—Immigration and demographics are among the chief factors that will sustain the U.S. housing markets over the next five years, 10 years and even 20 years, according to a panel of eminent real estate economists who spoke here Friday morning at Inman News' two-day summit on the U.S. housing market.

The economists included David Stiff, senior economist of Case Shiller Weiss; Leslie Appleton-Young, chief economist of the California Association of Realtors; Ken Goldstein of The Conference Board, and Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.

Retsinas said Harvard's housing center devotes a lot of its resources to analyzing demographics because "interest rates and other factors notwithstanding, it's people who buy homes, and we find that to be the best predictor of the housing market over the long term."

He said immigration and foreign-born households are crucial to housing markets in many gateway metropolitan areas and if immigration were curtailed, the short-term effect wouldn't be significant, but the long-term effect would be profound.

"People already here will be the home buyers of tomorrow. If we cut immigration 25 percent below its already slowing rate, the net impact would be less than 100,000 fewer households formed per year. But the real impact would be 10 years out," he said.

Immigrants have a "longer journey to homeownership" in high-cost housing markets, yet it "would be difficult to overstate the impact of immigrants" on housing markets, he added.

Appleton-Young said immigration is "very very important" to the Los Angeles housing market. Eight of the top 10 most frequent surnames of home buyers in the city are of Hispanic origin. Affordability is a hurdle for these home buyers, but they are finding creative housing options, including two-family houses that have two larger bedrooms and five smaller ones.

The median price of homes sold in California last year shot up 19 percent to $315,000 and the San Francisco Bay Area experience an "incredible rebound" with a nearly nonexistent increase in foreclosures even after the collapse of the dot-com sector, Appleton-Young said.

"We had (a bubble). You missed it. It was in the high-end San Francisco Bay Area housing market. Liquidity from the stock market was thrown at the high-end homes," she said. But moderate-priced housing--a $500,000-$800,000 house in that area--didn't see price declines.

Appleton-Young also mentioned that home buyers are looking more at their monthly payment than at the total cost of the house and that some 30 percent of people in one survey were looking at a home purchase as an alternative to investing in stocks.

Stiff said Case Shiller Weiss is forecasting house price increases in every area in the United States in the next 12 months with the only worrisome areas being the San Francisco Bay Area and San Jose, Calif.

Retsinas said home buyers are purchasing not just the lot and the house, but also a package of neighborhood amenities.

"Most people have already discounted the possible future gains of buying a home, and yet they are still buying homes. That is because of the use value—the schools, the neighborhood and the like. And that's where demographic trends are going to carry the housing markets forward," he explained.

The panelists predicted that 30-year fixed mortgage interest rates would hover in the 6.25 to 6.5 percent range this year. They agreed that an increase of, say, 2 percent in interest rates would have a very negative effect on the demand for housing. But they said such a dramatic increase this year is highly unlikely.

Stiff said the weak U.S. economy means interest rates aren't likely to increase suddenly and assuming stable interest rates, only continued house price increases would worsen the affordability situation.

Goldstein said interest rates would move up significantly only as a result of increased risk, which is "something of a constant," or an increase in inflation, which has been "dead for a long time."

What would cause an increase in inflation?

"Suppose there was a war and oil (prices increased) to $75 a barrel. That's only 6 percent of the consumer price index, so if you tripled that (component), you still wouldn't get a rise in inflation. The chance that interest rates are going to knock the bottom out of the (housing) market is insignificant," he said.

Goldstein also said the Federal Reserve, European central bank and Bank of Japan "have one eye on the domestic economy and one eye on the global structure." He said interest rates could be higher in the United States than warranted by domestic economic conditions due to "the intensified interconnection of the global economy."

Retsinas added that dual-income families are now the norm in the country and that changes the dynamic of housing costs. He said most of those families have already refinanced their mortgages and consequently wouldn't be affected by higher interest rates.

Copyright: Inman News Service

Contact ALTA at 202-296-3671 or