State Housing Market Sets Yet Another Record, According to UA’s Real Estate Center

TUSCALOOSA, Ala. – The Alabama housing market finished the year with a strong showing in December and yet another sales record, according to figures released by the Alabama Real Estate Research and Education Center at The University of Alabama.

This is the fourth time in as many years that total existing homes sales have set a record. In fact, with the exception of 2000, Alabama existing home sales have increased in 9 of the last 10 years.

“We have never seen as strong a housing market, nor a ‘bull market’ in real estate last this long,” said Dr. Leonard V. Zumpano, director of the center. Existing home sales were up 15 percent in 2004 and a staggering 104 percent between 1994 and 2004, Zumpano noted.

The market for existing housing set a record at the national level as well. The National Association of Realtors® reported that full-year sales rose by 9.4 percent to 6.675 million units in 2004 compared to the previous record, recorded in 2003, of 6.1 million homes. Sales of new homes also set a record in 2004, the fourth in the last four years and topping the one million mark for the second year in a row. Total new single-family home sales rose 8.9 percent last year.

“It is not coincidental that the nation’s homeownership rate also set another new record in 2004,” Zumpano said. “The Census Bureau just reported that the new annual rate of homeownership reached 69 percent, surpassing the record 68.3 percent set in 2003. Last year 74,414,000 American families owned their own homes.”

Existing home prices in Alabama also set a record in 2004, up 5 percent over last year, topping the 4.5 percent appreciation reported in 2003.

While these are very strong housing appreciation numbers, there is no evidence of a housing price ‘bubble’ in most of the Alabama markets tracked by the real estate center, Zumpano said.

He noted that home price increases are in line with the growth in income in most of the state’s metro reporting areas. In Baldwin County, however, home prices rose by 22 percent last year, increased 11 percent in Marshall County, and were up 8.8 percent in the Birmingham Metro Area.

“The Baldwin County Metro Area is atypical as it reflects the incredibly strong recreation and second home market along the Gulf Coast, with many of the buyers coming from outside the state,” according to Zumpano. “Marshall County has one of highest growth rates in the state, while strong in-migration into Shelby and St. Clair Counties has helped support prices in the Birmingham Metro Area.”

Despite the strong demand for existing housing, the supply of such properties actually fell during 2004. In 2003 there were 317,083 homes listed for sale compared to only 304,740 in 2004. For the year 2004, average selling time was 141 days, seven days shorter than the average for 2003.

“With these supply and demand conditions exerting upward pressure on prices, it is not surprising that the Alabama Housing Affordability Index fell for the first time in five years, down from last year’s peak of 194.4 to 183.4 for 2004,” Zumpano said. “While from a historical perspective these numbers are still very high, and well above the average U.S. housing affordability index numbers, they do reflect the combined impact of rapidly rising home prices and slowing rising mortgage interest rates. We estimated that U.S. housing affordability index fell from 140.8 in 2003 to 133.8 in 2004.”

Has the U.S. housing market peaked?

“Well, while home sales did turn down in December and total sales were somewhat below the consensus sales forecast of economists, there are no signs of a major market downturn in the near term,” Zumpano said.

“The economy continues to improve, household income growth should remain moderately strong, inflation remains at bay, and mortgage interest rates remain extremely attractive, all the ingredients necessary for a strong housing market. With most economists predicting that mortgage rates will rise slowly, increasing to around 7 percent by the end of the year, demographic factors such as population growth and household formation will continue to drive the market. While this current housing cycle may well have peaked in 2004, 2005 should still be a very good year for housing.”

Fannie Mae predicts that new home sales will fall by approximately 9 percent this year, while existing home sales are expected to decline by nearly 8 percent. These changes would still leave the U.S. housing market near record territory, Zumpano said, adding that decreasing affordability, at least in the short-term, will tend to dampen demand and slow price appreciation.

However, he noted existing home prices are still expected to increase by 4 to 5 percent during the year because of tight supply.

“The only trouble spots are those markets where housing price appreciation has been in the double-digit range for the past few years. Housing values may be unsustainable in these locations should interest rates rise sharply in the next couple of years,” Zumpano said.

While such an interest rate spike is unlikely, he said, the growing federal budget deficit, a weak dollar and a sizeable current account deficit leaves the domestic housing sector particularly susceptible to any type of economic shock such as another increase in oil prices, a higher than expected rate of inflation, and/or a decrease in foreign investment that could cause interest rates to increase.

The Alabama Real Estate Research and Education Center is part of The University of Alabama’s Culverhouse College of Commerce and Business Administration. The UA business school, founded in 1919, has been recognized repeatedly for offering a high-quality, cost-effective education.

Alan Lloyd, faculty scholar with the Alabama Real Estate Research and Education Center, contributed to this report.