Is there really a housing ‘bubble’?

It’s hard to pick up a newspaper these days without seeing coverage, many times prominent, front-page, wildly exaggerated coverage, of the state of real estate in the United States today.

The often implied “housing bubble” and concerns over “speculative” or “investment” buying catches the interest of a large number — and broad spectrum — of consumers and, let’s not forget, sells more newspapers.

But, let’s separate fact from fiction, or substance from “froth,” to quote Federal Reserve Chairman Alan Greenspan.

Here in Spokane, housing continues to go strong. Builders affiliated with the Spokane Home Builders Association are extremely busy with new home construction, and the demand is high for new housing in our region.

The latest numbers from the U.S. Commerce Department reinforce that housing demand continues to surge nationally. The pace of new home construction remained strong in June, closing out the quarter at a seasonally adjusted annual rate above 2 million units for the second quarter in a row — that’s a sturdy 9.7 percent above the pace of a year ago. But, these numbers don’t tell the whole story.

Concerns about a housing price bubble are based on conditions in a relatively few overheated housing markets that are mainly in California and on the East Coast. This has little bearing on our region, where prospective buyers will find relatively affordable prices, financing opportunities that are safe and secure at some of the lowest mortgage interest rates in decades, and housing that is setting a new standard in comfort and quality.

However, housing affordability is a concern for the school teachers, police officers, mail carriers and many other workers who make a vital contribution to this community, and that is a story that has far greater relevance in our community.

Ensuring a steady supply of capital for housing is a constant challenge. As a trade association comprised of builders, developers and others directly affiliated with housing, I can also tell you that we unfortunately are afflicted by many of the same regulatory challenges and neighborhood opposition to new housing that have become increasingly pervasive across this country.

There also has been a lot of noise about speculative home buying and its effect on home prices. In fact, a recent National Association of Home Builders (NAHB) survey of large national builders showed that just 3 percent of new single-family homes are being sold to speculative investors. And the contention that speculation will burst the so-called “housing bubble” is not supported by the facts.

NAHB’s survey showed that in the nation’s hottest markets, most builders have instituted point-of-purchase programs designed to discourage speculative investment in new homes. Many builders now sell only to people who plan to occupy the new home. Some are writing contracts that preclude the buyer from selling the home within the first year or from selling before closing.

From a national perspective, the amount of speculative buying in the market for new single-family homes appears to be relatively low at this time, thanks largely to the efforts of builders who recognize the dangers of speculative activity.

Further, keep in mind that over the next 10 years, the U.S. population will grow by 30 million people, and each and every one of them will need a place to live. In fact, household growth, along with replacements of existing homes and demand for second-homes, virtually guarantees demand for about 2 million new homes per year over the coming decade.

Despite this burgeoning need, builders aren’t likely to get ahead of demand anytime soon. The building industry is challenged by major constraints on new development, particularly in high-growth markets across the land. Such constraints include slow-growth zoning ordinances, not-in-my-backyard sentiments and significant regulatory hurdles. In fact, in some very popular markets, it can take four or five years to get through the approvals process before breaking ground on a new project. When land is taken off the market in this way, existing-home prices rise accordingly as demand outpaces new supply.

It’s important to remember through all of the buzz associated with rising home prices that basic rules of supply and demand virtually ensure that home values will rise in the future, though likely at a slower pace than that charted in recent history.