16, 2005 - Last Updated: 7:03 AM
Housing bubble may stay afloat
local demand, prices will remain strong
BY JOHN P. MCDERMOTTOf
The Post and Courier Staff
George Reavis and Craig Comer have been paying
particularly close attention to all the hand-wringing over whether the real
estate bubble will burst.
Their company, Reavis-Comer Development, recently razed a former
gas station at Coming and Cannon streets downtown, where over the next
couple of years it plans to build 23 single-family homes, three duplexes and
a handful of condominiums.
"We're betting $12 million that the bubble is not going to burst in Charleston,"
Reavis said Wednesday.
The partners, whose 1.4-acre development is called Cannon Place,
said they know the steady rise in property values can't go on forever. At
the same time, they and many other real estate observers in the region are
confident that the local market is not in any danger of collapsing.
"People are still coming to Charleston,"
Reavis said. "We may not see prices continue to increase at 20 percent a
year like we've been seeing, but I certainly don't think they would decrease
or depreciate, by any means."
The once-pedestrian subject of real estate values -- and the
possibility that they could drop after a long run-up fueled by rock-bottom
interest rates -- is now part of the national conversation, from chatter at
cocktail parties to official hearings on Capitol Hill.
Federal Reserve Chairman Alan Greenspan last week openly fretted
that prices in some U.S. housing
markets are "frothy" and overvalued. Regulators this week warned banks about
the potential dangers of risky loans and relaxed lending standards. Time
magazine chimed in on the feverish market rush with a cover story titled
"Home $weet Home: Why We're Going Gaga Over Real Estate."
All of this attention has some homeowners asking whether the Charleston
real estate market is on the so-called bubble.
Broadly speaking, the answer is no, numerous experts agreed. But
that's not to say there won't be pockets of pain in the event of a downturn.
Most at risk are the highly leveraged, short-term buyers who are betting
that local property values will continue to appreciate.
Real estate bubbles typically form when speculators and other
buyers pump up property values well beyond the median income levels of a
particular area. When demand slows -- perhaps because of rising interest
rates or a localized economic catastrophe -- the bubble pops, the market
corrects itself and prices decline.
As they survey markets around the country, bank regulators
increasingly are worried about that scenario playing out.
Just this week at a convention on Kiawah Island,
a Federal Reserve official said the "remarkable bull market" in real estate
is fueling a rise in speculative buying that could lead to deep financial
losses. Federal Reserve Governor Susan Bies said she was worried about the
banking industry's growing use of exotic "affordability" financing products,
such as interest-only loans and second mortgages with unusually high
Echoing previous assurances by the Fed chairman and other economy
watchers, Bies said real estate prices are not in any danger of collapsing
across the board. The fallout, if any, will be dictated largely by local
economic conditions, namely job growth and population trends, she said.
In the Charleston
metro area, the median home price in the first quarter of 2005 rose 7
percent year-over-year to $189,300, slightly more than the national median
of $188,800, according to the latest statistics from the National
Association of Realtors.
First-time homebuyers Jennifer Harris and her husband, Evan Harris,
got a taste of the local bull market when they started house hunting in West
Ashley and on James
Island last summer. "If there was a good house, there might be three offers
before it was even listed," she said. "That was frustrating."
The Harrises, who bought a two-bedroom, two-bath house in West
Ashley last September, think they have made a good long-term investment, she
"The buying process can be difficult here, but once you get into a
house, if you chose the right location and right house, there will be price
appreciation and a market for it," she said.
Tanya Emerson also isn't losing any sleep over the possibility of
declining property values, though she is watching interest rates closely.
Emerson, who works at Middleton Place, bought a three-bedroom
starter home in Summerville last July, after determining she would get more
for her money there than in Mount Pleasant, where a smaller house was
$30,000 more. She bought with plans to trade up.
"I got a five-year adjustable rate on my mortgage, but within five
years I'll probably turn over this property and get the house I really
want," she said.
Emerson estimated the value of her home has risen about $20,000 in
the past year, based on sales of comparable houses nearby. "I was excited
about that," she said.
Al Parish, an economist and business forecaster at Charleston
Southern University, said local real estate values should continue to hold
up, barring the effects of a devastating hurricane or other unforeseen
Parish bases his bullishness mainly on the 15,000 new residents he
estimated are flocking to Berkeley,
Charleston and Dorchester counties each year. It's those buyers, not
short-term speculators, who account for the bulk of local real estate sales,
he said. "We are experiencing population growth, which is driving our
housing demand. ... We're creating a town the size of Mount Pleasant about
every two and a half years," he said.
Many of these buyers, he said, are flush with proceeds from homes
they sold in pricier real estate markets, such as cities in the Northeast.
That gives them more purchasing power when they relocate to or purchase a
second home in the region.
"That's not a bubble; that's true demand," he said.
Parish predicted the relocation trend will continue, keeping
pressure on property values.
"I don't see demand slowing up for decades," he said. "I think it's
a fundamental long-term demographic change. As the U.S.
population ages and baby boomers retire, they're going to be moving from
colder climates to the Southeast and the Southwest."
Housing markets throughout the state are in good shape to weather a
downturn, said Ron Rogers, director of the University of
South Carolina's Center for Applied Real Estate Education & Research.
"In South Carolina,
in general, we don't have the characteristics of a bubble," Rogers said.
But that's not to say a real estate slowdown won't cause problems,
especially in the coastal resort markets where rapid gains in property
values have attracted speculative buyers. For instance, short-term investors
in a beach home or apartment-turned-condo might not be able to charge enough
in rent to cover their mortgages if demand sours or if interest rates climb
said, bank regulators now are talking about clamping down on riskier
adjustable-rate loans, such as the proliferating interest-only mortgages,
and policing lending standards more closely to curb speculation. "Is that
going to cause prices to collapse? I don't think so, but it is going to
cause prices to soften or not increase as rapidly," he said.
Speculation is less of an issue in the typical suburban
neighborhood where most buyers in the region live, said developer Ben
Gramling, who hopes to break ground this summer on the 5,000-home Cane Bay
Plantation near Summerville.
"In all of the communities I'm involved in here, there are cars in
front of the homes, bicycles in the yard and not that many 'For Rent'
signs," he said. "That's a good thing."