http://www.newsobserver.com/business/story/2728981p-9166363c.html

U.S. housing bubble floats past Triangle market
Construction boom holds prices down

[Triangle is Raleigh-Durham-Chapel Hill, NC]



Unlike most of the Triangle, housing prices soared from 2003 to 2004 in densely developed northwest Raleigh near Glenwood Avenue.
Staff Photo by Chuck Liddy
By FRANK NORTON, Staff Writer


After two years pacing about a cramped two-bedroom condo near Boston, Brian Medeiros is ready for a four-bedroom house with a sprawling yard in the Triangle.

Medeiros, who just moved here to work for Square 1 Bank in Durham, should have no trouble making that dream come true.

The Triangle has had relatively flat home prices the past eight years, inching up 2.6 percent annually. That's less than half the national average of 6.2 percent and far below the double-digit gains seen in comparable markets, according to the National Association of Realtors.

The slow pace of appreciation here is both good and bad.

For companies looking to relocate, it can lower personnel costs. For transplants and young families, it means relatively affordable homes in a job-rich area.

"Cost of living is one of the biggest reasons we're looking here," said Medeiros, 34. "I can sell my condo up there and for the same money walk into a house with a yard here."

But his gain is his new neighbors' pain. The greatest home equity boom in U.S. history has mostly passed them by.

Not only are local homeowners unable to sell their homes at fat profits, they can't tap into as much home equity, which has fueled conspicuous consumption in much of the country.

The reason for the discrepancy is basic supply and demand.

Low interest rates, job growth and flexible mortgages that make home buying easier than ever caused a buying frenzy across the country -- the Triangle included.

But many major U.S. cities are hemmed in by coastline, mountains or existing development. That leads to a shortage of new homes and a steep rise in prices.

Not so in the Triangle.

"Fly over the airport, and you'll see nothing but trees for miles all around," said Stacey P. Anfindsen, a managing partner with Birch Appraisal in Cary. "That's a lot of land for development."

Indeed, demand for houses in the Triangle -- measured in sales of new and existing homes -- rose 12.5 percent in the second quarter from a year earlier. But the supply of new homes, estimated in housing permits, is up 21 percent, according to Market Opportunity Research Enterprises in Rocky Mount. That balance is not expected to change anytime soon.

And despite prolific home building, the amount of available land in the region is steady at a roughly 16-month supply -- the same since 2000, said Ed Dunnavant, a researcher in Raleigh for Metrostudy, a land research group. That means the construction will go on and will continue to temper home prices.

Parts of Wake, Franklin, Chatham and Johnston counties are expected to see unprecedented growth as Interstate 540 expands and connects more outlying areas with Triangle job centers, said Brent Overton, a statistician who tracks development trends for Coldwell Banker in Raleigh.

It has already started. Wake County ranked No. 5 nationally in the number of new homes added -- 45,000 -- between 2000 and 2004, according to a July report by the Census Bureau. The Triangle sprouted more than 75,000 homes in that period, mostly in dozens of new subdivisions that flank I-540.

That vast supply of new three- and four-bedroom homes with easy financing is a curse for local home sellers. They must upgrade their homes or lower their prices.

Struggling sellers

Joshua Stilwell says the boom near Triangle Town Center in northeast Raleigh has made it harder for him to find a buyer, despite numerous price cuts. His best offer so far: $3,000 below the $155,000 he paid three years ago.

"I thought I would do a lot better here given the location and all the growth," Stilwell said.

There are, of course, exceptions. Real estate agents report double-digit price gains in isolated pockets, generally older neighborhoods near downtown Raleigh and the university areas of Durham and Chapel Hill. But these neighborhoods have less available land and few new homes. That limits competition.

Most other homeowners are dealing with competition from builders who not only offer shiny new homes but move-in deals.

DenMark Construction, for example, is offering $8,000 to buyers who close on a home in its Glen Oaks subdivision in Youngsville, no strings attached.

"It's disappointing," said Renee Tuttle, 38, who had 40 showings before a buyer last month offered 5 percent more than the $141,000 she and her husband paid three years ago. And that's after the couple spent $5,000 on a fourth bedroom and other upgrades for their North Raleigh house.

"We worked hard to improve our home and have almost nothing to show for it," Tuttle said.

But the plodding prices indicate stability in a time of hyperactivity, many economists say.

Federal Reserve Chairman Alan Greenspan has warned that overheated markets could see destabilizing price falls, but not those areas without inflated values. That's good news for the Triangle.

National median home prices in the second quarter rose 13.6 percent from a year earlier, the sharpest climb since 1979, the National Association of Realtors reported Monday. Even the Raleigh-Cary area saw an unusually strong increase for the quarter, 7.4 percent, but still was near the bottom third of 149 metropolitan areas studied.

The trade group said its figures for the Durham area were flawed in the second quarter but expects they will show a gain similar to Raleigh-Cary when revised in three months.

On the bright side

Another benefit of the trend is that property taxes haven't soared for existing homeowners here. And the slow pace of borrowing from home equity has a good side, too.

"In other areas, people are borrowing money for monster TVs, cars, new carpets and new appliances, and they're doing it through home-equity lines of credit and refinancing," said Joel Naroff, a Pennsylvania economist. That has falsely inflated consumer spending in the hot real estate markets. "There will be a reckoning," Naroff said.

Rates on 30-year mortgages hit a four-month high the week ended Aug. 10, which some economists say could mark the start of a decline in the housing market.

The Triangle may not be in danger of plummeting values, but the area's construction, real estate and financial service industries would take a hit from a downturn in housing, and that could slow job growth, said Campbell Harvey, a finance professor at Duke University. But it wouldn't be as bad as in other places.

Further, more reasonable home prices here attract businesses and professionals, and that buffers the economy. Home prices and the cost of living were key considerations this year when a group of California technology lenders decided to launch Square 1 Bank in the Triangle, rather than in California, Boston or other business-technology markets.

Scott Golden, director of human resources for Square 1 Bank, which will eventually employ 100, said less expensive housing means lower living and personnel costs.

"It's not like people were dying to move here, but when they come and see the home prices they get very excited," Golden said.

Bubble prospects

Some predict Triangle homes will appreciate more rapidly in the years ahead as the supply of land diminishes and more people on the coasts turn inland for affordable homes.

Lawrence Yun, a forecaster for the National Association of Realtors, said the Triangle is among his top picks nationally for faster home appreciation next year due to population growth and a strengthening technology sector.

"The Raleigh area may be in the early stages of the big-city effect," Yun said. "When land supplies eventually diminish, prices will surge."

sympathy bump