Stormy forecast for home market
Ronald E. Roel Newsday

March 19, 2004

Earlier this week, as I braced against the sleet of an unwelcome pre-St. Patrick's Day storm, I thought about what a strange season this has been - not only in the weather but in the economy and housing as well.

Government reports indicate an improving economic picture, but workers see little hiring or new job prospects.

Inflation is ostensibly low, but consumers are deeply anxious over high gas prices, health costs and their inability to save enough for retirement.

Mortgage rates are at historic lows and real estate values are strong, but not even the heat of the housing market can melt the cold reality of unaffordable prices for many first- time home buyers.

Almost every week, I get calls and e-mails from young buyers voicing such frustrations; but recently, I received one that seemed to evoke a subtle shift in perspective.

"I am very, very skeptical of the housing situation," wrote this 29-year-old who lives on Nassau County's North Shore and commutes to his job as a video animation and graphics specialist in Manhattan. "Where are the stories of a young couple who only had $5,000 in the savings bank, a load of debt [student loans, credit cards, cars], was given a loan from a bank and bought a home for more than they can afford, and have been struggling mightily since, and most likely won't be able to provide the same guidance that their parents were able to do.

"I know this to be true because it is happening to people I know. Most of them have no business buying a home of any type and are getting loans and [getting] carried away with these inflated asking prices."

At the same time, he continues, he's not upset that he doesn't have a home today. Why? "Because I have a career that I worked hard on creating, I have a lot of liquidity - no debt - and so does my wife. But we refuse to buy at these prices ... and never will, no matter what."

While real estate experts say the housing market is slowly cooling, it's true that "these prices" remain pretty high. This week, the Multiple Listing Service of Long Island reported the median price for existing homes in Nassau County was $404,500, up 10.8 percent from a year ago. In Suffolk, the median price was $329,000, up 11.9 percent from February 2003; and in Queens, it was $335,000, up 15.5 percent.

Meanwhile, mortgage rates have dropped to the lowest level since July 4, setting off another wave of refinancing and buoying the hopes of many families looking to buy houses they might otherwise not be able to afford.

But more young buyers also seem to be taking the stance of the North Shore couple above that refuses to buy: They've moved from frustration to resignation to resolution. They're knowledgeable about the market, understand their financial resources and have decided to wait for prices to drop.

"I'm always being asked, 'Have prices peaked?'" Bob Moulton, president of Manhasset-based Americana Mortgage Group, told me. "Everything does correct over time, but with New York City as nucleus, Nassau and Suffolk don't have as much beta factor on the negative side." Translation: Prices change, but they're less likely to go down here.

The reasons, Moulton and others say, include the fact that there is not as much inventory of homes for sale in the metropolitan region as elsewhere, and there are lots of buyers who are preapproved by lenders to purchase homes at hefty prices - especially with mortgage rates so low. While fixed 30-year rates are hovering around 5.4 percent, adjustable rate mortgages, or ARMs, are another 2 percentage points lower. Adjustable mortgages are attracting buyers who are "bonus-driven," Moulton says, "people who are expecting favorable changes in income and getting ARMs in anticipation of prepaying them."

In addition, Moulton notes, there's more money available for first-time buyers - not like the early 1990s when credit tightened during the economic downturn, especially for first- timers. Getting mortgage money is easier these days, but consumers also are better educated, Moulton adds. These buyers are preapproved for a certain monthly mortgage payment - and that's what they'll stick to, even if rates go up.

Another industry veteran, mortgage broker Jack Eichelbaum of JDR Funding in Northport, agrees that the hot housing market (he calls it the "This is nuts" phenomenon) is going to last a little longer.

Eichelbaum, who's been in the mortgage and credit industries for more than 20 years, also says the proliferation of mortgage products has bolstered the market. "With two-income families, you can get into a $400,000 house with no money down," Eichelbaum said. "The no- money-downs, low adjustible rates - this has become a huge piece of the financing market."

There's a potential dark side, too, Eichelbaum notes. "Every time banks loosen documentation, they start questioning themselves," he said. "There's going to be a problem somewhere down the road. People get into houses that they don't belong in - and when they have no equity, people walk away."

Still, if interest rates weren't so low, "you wouldn't have any young families able to be here," Eichelman said. And even if prices slip - as they inevitably will - "you're going to have a little bit of exemption on Long Island" because of the perennial demand for the area's good school districts, he said. Prices are also buffered by the region's diversified economy.

For his part, my recalcitrant North Shore buyer says he isn't planning on leaving the area. "It doesn't matter where you go," he said. "I've looked at New Jersey, and properties are just as outrageous."

Copyright © 2004, Newsday, Inc.