8/14/2005
Through the roof
By Bob Fernandez and Alletta Emeno
Inquirer Staff Writers

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"Things can slow down, but there is no bubble in suburban real estate," said Jeffrey P. Orleans, chairman and chief executive officer of Orleans Homebuilders Inc. in Bensalem. "I'd bet my life on it."
He said that builders in the Philadelphia area are still selling homes in advance of construction. A shortage of land in the suburbs - which prevents builders from constructing large numbers of new homes all at once in mega-subdivisions - reduces the potential for a boom-and-bust cycle in this region, he said.

There are other reasons that the Philadelphia area might escape a home-price tumble, even if speculators in places such as Manhattan get burned. For one, this region's home buyers have been more cautious with real-estate lending fads.

As home prices rose beyond the financial means of buyers across the United States, mortgage firms developed new products that kept the market rolling. The interest-only mortgage, for example, requires buyers to pay interest on a mortgage but not the principal for up to 10 years. While this can lop hundreds of dollars off a monthly mortgage payment, buyers can face big losses if their home loses value.

In 2001, 1.6 percent of the nation's mortgages were interest-only. By 2004, the interest-only share of the mortgage market had soared to 22.9 percent, according to LoanPerformance, a subsidiary of First American Real Estate Solutions. In the Philadelphia area in 2004, only about 10 percent of buyers used interest-only mortgage loans.

Reflecting this caution - and a slow-growing regional economy - Philadelphia ranks 34th among the 50 largest metropolitan regions in median-home-price growth this decade, according to Economy.com, which analyzed data from the National Association of Realtors for The Inquirer. This ranking is based on sales of existing homes.

PMI Mortgage Insurance Co., of Walnut Creek, Calif., which insures mortgages for buyers who don't put down at least 20 percent, says Philadelphia is one of the least likely metropolitan regions to face a real estate slump in the next two years.

In its Market Risk Index, published in July, Philadelphia had an 8 percent risk that home prices would decline in the next two years. Boston had the highest risk, 55 percent. Pittsburgh had the lowest, 6 percent. The index is based on home-price gains, the labor market, and buyers' mortgage-to-income ratios.

Among the findings of the Inquirer analysis: In the city of Philadelphia, the median home price rose to $91,000 from $77,500 in 2003, as the number of sales increased to 23,606 from 20,976 in 2003.

Fifteen municipalities in the region saw declines in their median home prices.

An area of Upper Bucks County along the Delaware River had significant median price gains, reflecting the popularity of homes in the area as investments and weekend getaways. Lisa James Otto, owner of a New Hope real estate agency that bears her name, said that some wealthy Europeans had taken advantage of the strong euro, the European currency, and purchased getaway estates in Upper Bucks County.

Older boroughs accounted for more than 40 percent of the 89 towns with median price increases of 20 percent or more, as speculators moved into these undervalued areas and modest-income families used low-interest rates to buy first or move-up homes. "It's gotten very chic to own real estate as opposed to stocks and mutual funds," said Brian Kane, chairman of the Suburban West Realtors Association in Malvern.

Of course, strong gains in median home prices do not mean that the value of every home has a similar increase. For example, construction of expensive new homes in a given area can lead to a sharp increase in the median price, while not doing much to change the value of existing homes. In municipalities where few homes are sold, the median price can be skewed - up or down - by just a few sales. ... continue to page 3