Published December 2005

Housing bubble not likely
to burst in 2006

Will the housing bubble burst this year?

The answer is probably no.

Supply is still very constricted, which is pushing up land prices as developers compete for the opportunity to find suitable land to convert to housing. Those higher costs are built into the cost of a new home. Resales are moving up at the same pace because there is nothing to prevent them from doing so.

Developers’ profits are not excessive, as many of the anti-growth types would have you believe. So we are not likely to see values soften because developers have excess room in their margins to give back just to sell product.

Demand driven by natural in-migration and a recovery of job creation is what has developers competing hard on land acquisitions. That’s the main ingredient pushing up values. Even apartment rentals, which took a solid hit on occupancy rates after 9/11, are experiencing some rebound, with projections of improved occupancy and even rent increases in some pockets of the north Puget Sound for 2006.

Only a rise in interest rates might flatten demand with buyers. But it would have to be a substantial increase in interest rates — maybe 100 basis points or more — to make a meaningful dent in the demand curve.

Feeling squeezed like this, markets tend to become creative. This is what architects of the Growth Management Act were hoping for to some degree. In-fill and higher-density housing in existing urban areas is supposed to fill the demand as the market runs out of sizable tracts of land on which to build housing.

But these solutions tend to be smaller in number of housing units delivered, so they aren’t the entire answer. That means supply still won’t likely keep up with demand, thereby holding up values.

In previous housing bubbles, demand was stimulated by low-cost product. Interest rates, however, were double-digit — and a big hurdle for most buyers. Today, interest rates remain remarkably low, but the cost of housing is double what it was 20 years ago. That’s what makes this housing bubble unique from others in decades past.

The conclusion? Keep your eye on interest rates to gauge values this year. In a constricted-supply environment, where the economy (read job growth) is on a steady hold or rise, only a drop in demand via an interest rate bump could cool things down.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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