Miami Beach Real Estate Growth

The housing boom came under increasing pressure in 2007. With interest rates rising, builders in many states responded to slower sales and larger inventories by scaling back on production. Meanwhile, the surge in energy costs hit household budgets just as higher interest rates started to crimp the spending of homeowners with adjustable mortgages.

Nevertheless, the housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, the current slowdown should be moderate.

Over the longer term, household growth is expected to accelerate from about 12.6 million over the past ten years to 14.6 million over the next ten. When combined with projected income gains and a rising tide of wealth, strenghening demand should lift housing production and investment to new highs. But with the economy generating so many low-wage jobs and land use restrictions driving up housing costs, today's widespread affordability problems will also intensify.

Stretching to buy homes
Although monthly mortgage costs to buy a median-priced home with a fixed-rate loan have risen only in the past two years, affordability in the nation's hottest housing markets has been eroding for some time. Unlike in metropolitan areaswith more moderate apreciation, the interest rate declines in 2000-2003 did not offset the impact of skyrocketing prices in these markets. Affordability pressures are now spreading, with median house prices in a growing number of large metros exceeding median household incomes by a factor of four or more.

Even so, homebuyers scrambled to get in on still-hot markets last year. In stretching to afford ever more expensive homes, borrowers increasingly turned to mortgage products other than fixed-rate loans to lower their monthly payments at least initially. The most popular of these loans was standard adjustable-rate mortgage, followed by interest-only loans, with payment-option loans a distant third.

In just two years, interest-only loans (which defer principal payments for a set number of years) went from relative obscurity to an estimated 20 percent of the dollar value of all loans and 37 percent of adjustable-rate loans originated in 2005. Payment option loans, which let borrowers make minimum payments that are even lower than the interest due on the loan and roll the balance into the amount owed, accounted for nearly 10 percent of last year's loan originations, but a much smaller share of outstanding loans. While these products helped to shore up housing markets last year by blunting the impacts of rising interest rates and home prices, proposed federal guidelines may limit their use in the future.

Although borrowers with interest-only loans will see their housing outlays jump when their principal payments come due, these increases are still several years off. Borrowers thus have time for their incomes to catch up, for interest rates to fall, or to either refinance or move.

Fortunately, most homeowners have sizable equity stakes to protect them from selling at a loss even if they find themselves unable to make their morgage payments. As measured in 2004 - before the latest house price surge - only three percent of owners had equity of less than five percent, and fully 87 percent had a cushion of at least 20 percent.

House Price Risks
The greatest threat to housing markets is a precipitous drop in house prices. Fortunatly, sharp price declines of five percent or more seldom occur in the absence of severe overbuilding, dramatic employment losses, or a combination of the two. The fact that these condtions did not exists and that interest rates were so low explains why the housing boom was able to continue without interruption when the recession hit in 2001.

With building levels still in check and the economy expanding, large house price declines appear unlikely for now. But if the economy falters, both job growth and housing prices will come under renewed pressure. This would spart higher default rates, especially among subprime borrowers, and turn housing from an engine of economic growth to a drag.

Strong Demand Fundamentals
Despite the current cool-down, the logn-term outlook for housing is bright. New Joint Center for Housing Studies projections - reflecting more realistic, although arguably still conservative, estimates about future immigration - put house hold growth in the next decade fully 2.0 million above the 12.6 million of the past decade. On the strength of this growth alone, housing production should set new records.

With each generation exceeding the income and wealth of its predeccessor, growth in expenditures on home building and remodeling should match if not surpass the current pace. For example, the median inflation-adjust income of households in their 40s was $1,800 higher in 2005 than in 1995, while that of households in their 50s was $1,900 higher. Similarly, between 1995 and 2004, the median wealth of those in their 40s was up by $33,600 and of those in their 50s by $46,000. But incomes at the top are increasing much faster than those at the bottom and in the middle. These differences will likely drive rapid growth in the burgeoning luxury sector of the housing market, but present stubborn affordability challenges for household with low and moderate incomes.

As members of the baby-boom generation reach their 50s and 60s with record wealth, they will boost the market for senior housing and second homes. At the other end of the age spectrum, the baby boomers' children, together with same-age immigrants and second-generation Americans, will buoy demand for starter homes and apartments. As this large generation moves into adulthood, demographic forces will favor rental over the sale housing.

Meanwhile, foreign-born and minority households will continue to be the fastest-growing segments of the housing market. Thanks to strong immigration and slightly higher rates of natural increase, the minority share of households should expand from 28 percent in 2005 to over 32 percent in 2015.

Foreign-born individuals already represent 13 percent of the US population, including 18 percent of yound adults aged 20to 29. Immigrants have added especially to the ranks of the baby-bust and echo baby-boom generations, bringing new life to center cities that once experienced population declines. Immigrants thus represent not only a key source of labor for the housing industry, but also a large and growing customer base.

The Outlook
Demographic trends over the next ten years are highly favorable for home builders, real estate brokers, and the mortgage finance industry alike. Strong household growth, together with rising income and wealth, will likely translate into increased demand for housing across all age groups, a stronger appetite for mortgage debt, and healthy spending on home improvements.

But low and middle income households are increasingly giving up share of the expanding national pie to the richest households. As a result of this growing disparity, housing investment will likely be greatest among households in the top tenth of the income and wealth distribution. To expand their overall markets, suppliers of housing and mortgage credit must therefore find new ways to keep housing affordable to families with more moderate means.