Choices abound in Atlanta
Monday, June 20th, 2005Variety spurs market
By MICHAEL E. KANELL
The Atlanta Journal-Constitution
Published on: 06/19/05
Last year, Atlantans probably had more housing choices than ever — and we made use of all of them.
We tore houses down to build on prime lots close to town, and we lived farther out to buy more house; we snatched up condos and townhomes to downsize, and we plunked down top dollar for a McMansion; we took out interest-only loans to keep monthly payments down, and we traded equity for cash, then spent it on renovations.
We had choices on land: lot size, location and desirability. We had choices on price: how much, how affordable, how much house for the buck.
And we had choices on mortgages, picking among the traditional 30-year fixed rate and the many flavors of adjustable rates, including the interest-only loan.
That kind of variety has produced a spectacular surge of construction stretching back a decade. The surge continued in 2004, according to the annual AJC Home Sales Report, compiled from sales deeds filed at courthouses in metro Atlanta.
A number of economists fret that, nationally, housing has become a bubble — that is, a market expanding on the force of speculation, its sales and prices growing faster than the fundamentals supporting them.
In a superheated market, a kind of gold rush mentality takes over. While some look to get into the market before they’re priced out, others look to make a quick buck.
Among its hallmarks:
•Overbidding. When buyers fear they are being priced out of a soaring market, they compete against each other for a home, sometimes paying far more than the asking price.
•Flipping. Investors confident of rising prices will sell a home even before closing on it.
•Lavish renovations. After all, homeowners figure to recoup it all, and then some, when they sell.
•Cash-outs. If the value of the home will keep rising, why not trade equity for cash?
By and large, Atlanta hasn’t fostered a speculative market. Perhaps that’s because the real estate market here seems built of different stuff.
In places like Boston, Los Angeles and San Francisco, prices have soared partly because buildable land is scarce. Not so in Atlanta. And unlike the more sluggish markets of the heartland, Atlanta boasts a steady stream of new residents and at least modest job growth.
As a result, we just don’t see the kind of price increases that threaten stability in the market.
The median home price in the United States rose 12.5 percent last year. It is up 50.5 percent in five years and 249 percent since 1980, according to the Office of Federal Housing Enterprise Oversight.
In five years, Georgia’s median price has jumped 30 percent. In California, it has doubled in five years and is up 25 percent for a single year — nearly five times the pace in Georgia.
In Los Angeles, the median income last year was $49,662, but the median home price was $438,150 — nearly nine times as much, according to a recent report by Forbes magazine. In Boston, the median income was $63,176 and the median home price was $374,800 — roughly six times as much.
But Atlanta’s median income was $55,939, and the median home price was less than three times that: $156,580.
Stories about flipping are heard around Atlanta. But the extent of the practice is tough to pin down, not endemic as it is in cities where annual price increases are in double digits.
Yet there is an underlying confidence that home prices will keep moving up.
That girds metro Atlanta homeowners to pour money into improvements, and their optimism has thus far been well-rewarded.
Among those who renovate, Atlantans spend an average of $73,425 on major upscale kitchen remodeling, $40,073 on an upscale bathroom addition and $34,073 to add an attic bedroom, according to Remodeling magazine.
In general, Atlantans have been recouping those costs when they sell the property, the magazine reports. In contrast, homeowners nationally come up short of recouping those kinds of costs when they sell.
Starter homes
First-time home buyers are in the right metro area.
Because of geography that imposed no limits on sprawl, relatively low costs, permissive development rules and a strong real estate market, Atlanta has consistently led the nation in housing starts.
It appears that Phoenix will surpass Atlanta this year but not because Atlanta’s development has slowed. About 56,030 permits were issued in metro Atlanta last year, up from 53,530 in 2003, according to the National Association of Home Builders.
The result has been sprawl and immense traffic problems, but home buyers seeking more affordable housing or more house for their money have been willing to make the trade-off.
The median home price for new houses is $189,000, but it is not hard to find new homes at much lower prices.
Paulding County’s 30153 boasted the least expensive median price for new homes last year: $110,800, according to Smart Numbers, an Atlanta-based company that tracks home sales and prices.
Seven other ZIP codes made the AJC top 10 list for affordable new starter homes. That list includes ZIP codes in which at least 75 homes were sold, where homes are among the lowest median prices, and where prices appreciated at least 5 percent: 30220 in Coweta, 30179 in Paulding, 30566 in Hall, 30093 in Gwinnett, 30291 in south Fulton, 30016 in Newton and 30134 in Douglas — were priced less than $150,000. But the entry bar is rising.
In fact, starter home prices are increasing faster than the area’s median price.
For instance, the median for new homes in Gwinnett’s 30093 climbed a stunning 30 percent to $140,900 last year, according to Smart Numbers. In 2003, Paulding County’s 30179 had the cheapest median for new homes: $98,400. But last year, the median price in Paulding soared 24 percent to $122,250.
Sellers of new homes at the other end of the income ladder can only envy those price spikes. Many are seeing declines — although prices would have a long way to fall to be competing with starter homes in Paulding.
The most costly new homes last year were in north Fulton’s 30022 ZIP code — a median price of $416,900. That represents a 5 percent dip from the year before.
Nationally, new homes represent about one-fifth of all home sales. But Atlanta is different. More than 40 percent of total sales in Atlanta were new homes — 45,457 homes, according to Smart Numbers.
That vast reservoir of new homes dampens price increases for existing homes.
Overall, the median price for resales is $166,500 in metro Atlanta. Of course, for existing homes, too, a little searching turns up homes for much less.
Some Atlantans had it all: They bought existing houses close to the city, then tore them down to build modern, larger, more expensive houses.
Maybe it was the weariness of long commutes or a demographic shift, or maybe just the gradual economic shift as the nearer suburbs fill up. But the increasing scarcity of cheap, buildable and desirable land close to town has led to an epidemic of “tear-downs.”
DeKalb County had eight tear-downs in 2001, according to the county Department of Public Works. That surged to 20 the next year, 152 in 2003 and 319 last year.
At the current pace, there will be around 470 tear-downs in DeKalb this year.
Calm growth
The pool of new homes and first-time buyers translates to smoother growth in Atlanta’s market.
A recent study suggests that the infusion of first-time home buyers into the market has helped keep national home prices from moving too erratically, said Jonas Fisher, senior economist for the Federal Reserve Bank of Chicago.
“We think that first-time home buyers may have a role in explaining the large drop in aggregate volatility since 1994,” Fisher said.
The flip side is that first-time buyers are often those who are financially stretching the most to own a home. Many have been able to own because lenders have loosened requirements or offered loans with lower monthly payments.
New types of mortgages, lower down payment requirements, tax breaks for home-ownership and various federally backed guarantees allow an ever-wider group to own homes.
Pessimists worry that the new loans put the borrower on thin ice, vulnerable to rising interest rates and dipping home prices.
But surely the upside has been dramatic: Homeownership has now reached 69 percent of American households, according to Harvard’s Joint Center for Housing Studies.
Atlantans have been among the most eager to sign on to lenders’ creative financing.
According to Loan Performance, roughly half of the new mortgages in 2004 were interest-only — a loan in which the borrower pays no principle for a set period, sometimes up to 10 years.
In the meantime, only a rising home value would increase the borrower’s net worth.
Possible downside?
So Atlanta’s market depends on that combination of easier loans and first-time buyers, the injection of new purchasers who pump up sales numbers, prices and even the size of homes.
“To the extent that extending borrowing constraints matters to anyone, they are particularly significant to first-time home buyers,” Fisher said. “People able to get a house with a smaller down payment, they are able to get a bigger house.”
Some economists worry that those enticements to new buyers are dangerous. If interest rates spike, if the economy hits a rough patch and sheds jobs, if other costs — like energy — soar, many of the marginal home-owners could be in trouble.
Still, few economists put Atlanta anywhere near the top of the charts for risk.
Atlanta’s economy should keep growing and spinning off jobs, and the vast majority of Atlanta homeowners, including first-time buyers, should manage just fine, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.
Pessimists have been warning of interest rate boosts for many months, and the mortgage rates are as low or lower than they were a year ago. Besides, they overstate the danger, Dhawan said.
“Interest rates don’t seem to matter to the housing market,” he said. “In the early 1990s, when there were problems in the housing market, interest rates were falling.”
He dismissed concerns about a housing bubble in Atlanta — at least for the near future.
“I see orderly moderation in housing,” he said. “I think there’s no trouble in the housing market until 2010 or later.”
A weakening of either in-migration or job growth could tip the market into trouble. Combine a big falloff in buying with a large and still-growing supply of new homes, and Atlanta might see home prices drop, some economists say.
Although he also rejected the idea of an Atlanta bubble, Mark Vitner, senior economist at Wachovia Securities, said a hit to Atlanta prices is possible.
But any glitch will be temporary, he said.
“The long-range dynamics that drive Atlanta and make Atlanta a good place to do business have not changed.”
Atlanta has a younger-than-average population, an educated work force, a massive airport and the right location, he said.
“It’s the hub of the fastest-growing region of the country,” Vitner said.