Clear skies ahead for home values

The outlook is also good on the supply side. The building industry was hurt in the 1980s when it oversupplied the market. But now it's much more conservative, often selling homes before they are built. Plus, in many areas, local zoning makes it difficult for builders to add new developments.

That doesn't mean a national decline is out of the question, some experts warn. "People can't remember when housing prices actually fell ... so they think their downward risk is zero," says Stephen Thode, a finance professor at Lehigh University in Bethlehem, Pa.

Accounting for inflation, there have been periods when average US home values have fallen. An International Monetary Fund report found five such busts - when real prices fell at least 14 percent - since 1970, says Christopher Mayer, vice president of Provident Bank in Gaithersburg, Md.

Mr. Mayer worries about scenarios that could cause more such busts in the future. For example, if the construction industry forgets the lesson of the '80s, it might overbuild again. Builders can find ways to develop properties in dense and urbanized areas by razing old homes or industrial properties, he says. And communities have at times changed zoning rules to fit in more housing per acre.

Any shocks to the economy - such as 10 to 15 percent unemployment or another speculative shift from stocks into real estate - could also lead to broad declines, Duncan says, though he doesn't see these on the horizon.

In the near future, everyone's watching interest rates. A sudden large increase "could really come down on the market and people might just start to panic," Wong says. But he and others say a gradual increase is much more likely, giving people time to adjust.

Homeowners with large mortgages face the greatest risks. For those with 20 percent equity in their homes, for example, a 10 percent decline in value would mean a 50 percent loss of equity, Mayer indicates. Because so many families rely on two incomes and carry high debt loads, "the ability of the average American consumer to take a setback is much less than it once was," he says.

Especially vulnerable to rising interest rates are homeowners with adjustable-rate mortgages. In 2003, 19 percent of borrowers opted for ARMs, which rise or fall according to interest rates. That's down from a peak of 39 percent in 1994, but the Mortgage Bankers Association predicts the figure will climb to 23 percent this year.

The high end of the market is what worries Mr. Thode. Many baby boomers with huge houses today may find it difficult to resell if they decide to downsize. "Presumably they will sell them to 'echo boomers,' people their children's age," he says, but those echo boomers may be shelling out so much for Social Security and Medicare taxes that there's not enough left over.

Does that mean you shouldn't buy a house? Even many skeptics aren't willing to go that far, especially since homeownership represents far more than simply an investment. "A lot of quality-of-life issues are associated with that, like schooling and commuting," Mayer says. But keep in mind "you are buying at what has to be somewhere near a peak right now. [Housing appreciation] could go for a few more years. When it will end is the key question that no one can really answer," he says.

Housing is an inherently utilitarian investment, says Stephen Roulac, a consultant in San Francisco who is bullish on real estate. His analysis of economic factors and social patterns in which people are cherishing time at home more indicates the housing market is undervalued by roughly 20 percent. "Absent a shock to the system," Mr. Roulac says, "[prices] will still go up."

Page: 1 | 2