Clear skies ahead for home values

You know what happens if you blow a piece of bubble gum to the breaking point. As house prices keep expanding, many buyers wonder whether they'll end up with the investment equivalent of that sticky pink mess.

And who can blame them? Ever since the stock market took its three-year swan dive, Americans have shied away from markets that seem too good to be true. But real estate doesn't look like a bubble about to burst, many experts say.

Population growth, economic recovery, and reforms in the construction industry are likely to keep fueling the real estate market. True, a rise in interest rates is expected to dampen price increases in the next few years. But mortgage holders face more danger from individual circumstances - too much debt or not locking in low mortgage rates - than from the threat of a national housing downturn.

"In the late 1980s, there was a lot of speculation: People were buying housing stock, speculating on future returns, and selling it," says Perry Wong, a senior economist at the Milken Institute in Santa Monica, Calif. "This time is very different. People converted their assets into real estate because they didn't see a stable stock market."

Americans perceive residential real estate as the "new gold" - a store of stable wealth - at a time when stock markets are volatile, says one housing expert. Average national home prices have risen every year since at least 1950. Although prices are notoriously volatile in some metropolitan markets, and there's always a chance you'll get caught wanting to sell your house during a temporary dip, the last example of a clear-cut national housing bust was probably the Depression, says Doug Duncan, chief economist at the Mortgage Bankers Association in Washington.

This year looks good because of the prospects for job gains and continued low interest rates. The National Association of Realtors expects a 4.4 percent gain in median prices for existing homes ($177,400) and new homes ($202,900). That's not as big as the 7.5 percent gain in 2003. But moderate price appreciation could last a long time as population growth boosts demand.

Some 12 million new households will have formed in the United States between 2000 and 2010, according to a report last fall by Harvard University's Joint Center for Housing Studies.

Also, income growth has generally kept pace with rising home values. Between 1991 and 2001, US averages for both grew between 4 and 5 percent, the Harvard report shows. While home prices now outpace income growth in many metro areas, "it will probably all come back into line," says Allegra Calder, project manager for the report.

Even in some markets with the highest prices - where fears of a bubble are most common - demand tends to stay strong, experts say. Coastal cities such as Boston, Washington, and San Francisco, for instance, draw people because of their cultural, educational, and outdoor amenities. When Internet stocks bombed, "San Francisco saw a 25 percent decline in house prices over the course of a year," Mr. Duncan says, "but there was a group of people sitting out in the suburbs who said, 'Well, we've always wanted to live in San Francisco, so this is probably the time to buy' - and prices were back up the next year."

The housing market can be volatile, Duncan says, but a bubble is unlikely because most home purchases aren't driven by speculation. Investors who don't intend to live in the properties they buy make up less than 3 percent of the housing markets he's examined.

On the coasts and in other key immigration areas such as Texas and Arizona, population projections also suggest demand will stay strong well into the future, economist Wong says.

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