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6/3/2005
Home prices go up and up, experts debate the bubble
Natalie Kostelni
The Philadelphia Business Journal
With home prices still rising and the spring residential sales market in full swing, a
question must inevitably be asked: Is the Philadelphia region one of those little bubbles
that could burst, which Federal Reserve Chairman Alan Greenspan referred to recently?
Several factors make it unlikely
that the region as a whole is one
big bubble, but there are
overheated pockets within the
market that might pop,
especially as interest rates go up
and sales activity goes down.
"Philadelphia did not participate
in the bubble in the late '80s, but
we are potentially participating
in the bubble right now," said
Susan Wachter, a real estate
professor at the Wharton School
at the University of
Pennsylvania.
The difference between now and
two decades ago is that the city
and its suburbs constitute what
is called a constrained market,
one in which it's more difficult
for developers to build houses --
therefore capping the number of
available houses.
"When supply is constrained,
you're more likely to have froth
and volatility up and down,"
Wachter said.
Because of supply and demand, prices rise but an expectation is also created that prices
will continue to rise, she said. This has the potential to lead to a frenzy where panicked
buyers feel they need to seal a deal before prices go up any more.
Nick Buss, senior vice president and group manager of market research and valuations at
PNC Bank's real estate finance department, doesn't see much local "frothiness" at this
point. "Frothiness" is a term Greenspan used recently to describe some potentially
overheated markets.
Regardless, one main indicator, rising prices, points to a market in high gear. The area saw
prices jump 14.1 percent last year, which is above the national average of 11.2 percent. In
fact, the region has stayed above the national average for three to four years. Historically,
it has lagged.
"We've certainly seen a pickup in prices in the last year," he said. "If you asked me, a year
ago, if there was a bubble in general, I would say certainly not but I'm a little more
nervous today because prices seem to continue to skyrocket."
While the regional increase is higher than the national average, it isn't as high as the boost
in prices in other parts of the nation. Las Vegas experienced a 32.2 percent increase,
Washington, D.C., 21 percent.
The housing market in Philadelphia County, though, is an example of prices that appear to
be skyrocketing. Philadelphia saw median home prices surge by 38 percent to $116,663 in
the first quarter, according to Prudential Fox Roach Realtors' HomExpert report. That
figure is up from $84,333 for the same period a year ago. Based on that, Philadelphia led
the five-county region in median price increase.
The reason for the steep price hike is continued demand for condominiums in the high-end, luxury market, and that's helping to push up the median price, said Steve Storti,
senior vice president of marketing for Prudential Fox Roach.
"There's a huge uptick in new construction in the condo market," said Storti, whose firm
represents some of the high-rise developments currently under way. "There's a tremendous
amount of activity down there."
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