CRAVER'S COMMENTS

December 2004

IN THIS ISSUE

·         ON THE BUBBLE

·         SIDE TRIP

               

FUTURE ISSUES

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THINGS TO BE PROUD OF

 ALL OF OUR TROOPS WHO ARE AWAY FROM THEIR FAMILIES THIS HOLIDAY SEASON IN ORDER TO MAKE OUR LIVES SAFE AND SECURE.

DID YOU KNOW?

      THERE ARE THREE THINGS THAT A LEADER CAN DO WHEN ASKED TO MAKE A DECISION:  (1) THE BEST THING IS TO MAKE THE RIGHT DECISION (2) THE SECOND BEST THING IS TO MAKE THE WRONG DECISION (3) THE WORST THING IS TO DO NOTHING.

 

ON THE BUBBLE

    A couple of months ago I was watching “Good Morning America” while getting ready to go to work and was stopped in my tracks by a story on how the real estate bubble was going to burst nationwide. I usually give very little credence to any network news story in the months preceding our national elections, but this subject certainly caught my interest. Last May I attended a three day conference in Washington, DC sponsored by the National Association of Realtors. One of the featured speakers was Dr. David Lareah, chief economist for the National Assoc. When you consider that NAR is the largest trade association in the country (1.1 million members) as well as the largest political lobby in the nation, then you must rightfully conclude that Dr. Lareah is one of the top economists in the country as well. He says that the real estate “boom” we have experienced since 1990 will continue for another 10 years. I have attended three more of his lectures this fall just to see if he has changed his story. He hasn’t.

      Where is Good Morning America getting its information, you ask? Here is what Dr Lareah has to say. Wall Street investment bankers are putting out the story through their media outlets like THE WALL STRREET JOURNAL and THE NEW YORK TIMES. Their motive is to steer funds away from the housing market and into the stock market. For the first time in our history Americans have more money invested in the equity in their homes than they have invested in the stock market. 9/11 had a major influence on this trend as the stock market suddenly looked very vulnerable and volatile while the ever consistent housing market continued steady growth. Now you know why they are motivated to talk trash about the real estate market.  But what is real estate going to do over the next ten years? It’s time you heard “the rest of the story”.

     First, let’s define some terms and set some starting points. Lareah defines a “boom” as a period of healthy real estate expansion. Historically booms have happened every other generation. Conversely, Dr.Lareah says a “bubble burst” is when the average price of real estate in an area, region or nation  falls 50%. It normally take fives years to recover from such a drop. In 1991-92 there were around 3 million houses sold and 500 billion dollars worth of loan originations. In 2004 houses sold will reach a record 6.5 million and loan originations will top the 4 trillion dollar mark. There were modest backslides in 1994 and 2000 but the overall upward trend has been tremendous. Americans spend 30-40% of their household income on housing and related items. It is this constant spending on housing that Dr. Lareah credits for keeping us out of a recession, especially after 9/11.

     Where are the highs and lows you ask? This past year housing prices in Las Vegas went up 52% while Syracuse, NY had only a 1% growth rate. The medium price of a house is $650,000 in Anaheim, CA and $260,000 in the deserts of Las Vegas. Around here the medium price is around $215,000. Forty-nine metro areas in the US had double digit house price inflation this year. The Triangle area has had an average price growth rate this year between 4 and 5 per cent. This rate along with a steady annual increase in sales (3-4%) gives us what he describes as a good balance. 

         You might quickly suggest that all of this growth is strictly due to low interest rates. He says this is not the case.  Between 1998 and 2000 interest rates ranged between 6.8% and 8.3 % and the boom kept right on coming. Here are a list of reasons why we have had a 13 year real estate boom and why it will continue another ten years.

·         Technology has sped up and reduced the cost of the loan process by an average of $2,000. The entire real estate process is easier and more consumer friendly. The consumer has started looking at real estate as a more liquid product---like stocks.

·         Since 1991 there has been a concerted effort to involve minorities in home ownership. This has opened up a vast market. Today, for the first time, over 50% of Blacks own a home and the Hispanic percentage is not far behind.

·         The infamous baby-boomers are in their peak earning years and are buying second homes and investment property. This should continue for another 10-15 years. Lareah says he is being non-political when he says that the economic boom of the 90’s had nothing to do the Clinton policies but rather that the Boomers were entering their peak earning years. He also credits Reagan for ending the cold was in the 80’s thus creating a “peace dividend” in the 90’s. That peace dividend meant nearly balanced budgets due to reduced defense spending.  

·         Retirees are living longer and therefore staying extra years in the housing market.

·         The “bus generation” ( that’s the group that follows the Boomers) was a small bunch so the government increased immigration in the 90’s by 20 million people. It historically takes these newcomers about 10 years to enter the housing market. It’s happening now.

·         Boomer children are now entering the first-time home buying market.

   2005 should bring a predicted 6.2 million houses sold, second highest in history. Watch for critics to call it a slow down since it will be less than this year. He also predicts mortgage rates will hover in the 6-7% range. Remember that those are historically great rates. We currently have a comfortable 4.6 month supply of houses on the market in this country. A 10 month supply is the danger point.  Dr. Lareah says the only dangers on the horizon would be a sudden surge in interest rates or a run away national deficit. He defends the current deficit spending as necessary due to the war on terror but says it bears watching carefully.

      Bottom line---go out and buy a house.

 

SIDE TRIP

     Richard Childress, NASCAR owner (Dale Earnhardt used to drive for Richard), has built what is now North Carolina’s largest winery at the intersection of US 52 and US 64 near Lexington. Wine tours and tastings are available in this spectacular Tuscan designed winery. It is only ninety minutes south on I-85 and it is one half mile from the world’s best bar-be-que at Lexington Bar-B-Q No. 1.