WASHINGTON -- The 3,200 new monster homes rising out of a farm field near Charles Town, W. Va., are a testament to the frenzy gripping the U.S. housing market.
It isn't the scenic Blue Ridge Mountains or the lure of country living that is drawing home buyers from as far away as Washington, D.C., to this rural patch of West Virginia. It's price. At $270,000 (U.S.), these homes are half the cost of similar ones closer to Washington, a 100-kilometre commute to the southeast.
The housing boom here, and across the United States, is the product of the lowest interest rates in nearly half a century, a craving for ever-larger homes and a tax system that encourages people to take on the biggest mortgage they possibly can.
But in recent months, there have been hints that this red-hot market may be cooling off.
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Some critics warn that residential real estate has become a bubble about to burst, an event that could plunge the world's largest economy back into recession, sideswiping countries such as Canada that supply lumber and other building materials to the U.S. market.
Sales of existing U.S. homes slumped nearly 3 per cent in July, off the record annual pace of 6.92 million units set in June. Likewise, new mortgage applications have begun to fall, and the inventory of newly built homes is rising.
More worrying for the longer term is that house prices are outstripping what families are earning, making homes increasingly less affordable. "Over the long haul, people have to be able to pay their mortgages," explained economist Peter Morici, a business professor at the University of Maryland. "House prices can't exceed increases in incomes for very long."
Time may be running out. The average house price is now 3.4 times greater than the median family income -- a new record and nearly 20 per cent higher than the average of the 1970s, 1980s and 1990s. In the four years ended June 30, median home prices rose 33 per cent, while per-capita personal income climbed just 10.4 per cent.
Prof. Morici said a total "price collapse" in residential real estate is unlikely but a moderation of increases nationally and falling prices in some overheated markets is possible.
When that happens, some home buyers wind up with "upside down mortgages," where the size of their loan exceeds the depressed value of the house, Prof. Morici said.
Economist Robert Schiller of Yale University, who accurately predicted the dot-com crash in his book Irrational Exuberance, warned in a recent Wall Street Journal article that Americans should now brace themselves for a possible correction in home prices.
"This may be the beginning of the end of the bubble," Prof. Schiller said. "But what we've seen in the past is that the housing market is different from the stock market. It doesn't crash, it slows down . . . The rate of increase is going to go down, and become zero. And then eventually, become negative."
The first trigger could be mortgage rates. The U.S. Federal Reserve Board has begun what it has promised will be a "measured" return to higher rates, pushing its key lending rate to 1.5 per cent from 1 per cent since June. Those, and future increases, are expected to push average mortgage rates, now at 5.8 per cent, to 6.25 per cent by year-end, and even higher in 2005, according to forecasters.
The impact of higher rates is likely to be felt most in areas where buyers are stretched thin, lured into the market by "no-money-down" mortgages and other incentives.
Washington is among a clutch of U.S. cities, mostly on the East and West coasts, that have seen the greatest rise in prices in recent years. Home prices here are up 23 per cent from last year, compared with a national average of less than 8 per cent. Other hot markets are Las Vegas, Boston, Anaheim and San Francisco, where the median house price has hit $650,000.
"That tells the story right there," said David Lereah, chief economist at the U.S. National Association of Realtors. "You need a very high median income to qualify for that mortgage. At some point, the cup runneth over, and something has to give, and that may be prices."
Still, Mr. Lereah and others insist the housing boom is still alive and well. He rejects the idea a bubble has developed. It's just that some parts of the country are feeling the boom more than others, he said.
Even industry insiders acknowledge that these heady times can't last forever. But David Berson, chief economist at the Washington-based mortgage lender Fannie Mae, said that doesn't mean a slump is around the corner.
"We can't sustain a record-setting pace forever, but the level we come down to will still be very, very good," he said. He predicts that U.S. housing starts will hit a new record this year of 1.7 million, up from last year's record of 1.5 million.
The fate of the U.S. home building industry is likely to have a powerful ripple effect in Canada, which supplies roughly a third of the U.S. lumber market.
But there again, many experts insist there's no cause for despair. Doug Smyth, a Vancouver-based lumber industry consultant, says Hispanic immigration, baby boomer wealth and the ever-growing size of U.S. homes will sustain an average of 1.4 million home starts a year through 2012.
The good news for lumber producers and other suppliers of building materials to the U.S. industry is that Americans aren't just building more homes, they're building them bigger. Mr. Smyth said the average size of new homes grew nearly 10 per cent to 2,329 square feet between 1996 and 2003. Three-thousand-square-foot super homes now make up nearly 20 per cent of the market, up from just 7 per cent in the mid-1980s, he added. While homes are getting more floor space, they're also being built with higher ceilings, all of which requires a lot more Canadian lumber.
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