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When one of the nation’s largest homebuilders recently lowered its sales forecast for next year,
Wall Street shuddered. Housing shares, in particular, plunged, reacting to the fear of slower growth. Media
pundits suggested that the housing boom, the fundamental engine of today’s strong economy, was coming to a
halt.
There has been a very real housing boom in a number of markets across the country. California, Florida,
and sections of the Northeast—in particular Manhattan and surrounding communities from Locust Grove on Long
Island to the Connecticut shore—have experienced staggering price increases that may have reached their
highs. However, in most major urban areas, and definitely in Atlanta, a more realistic growth in housing
prices has positively affected the economy. Atlanta’s current price appreciation of 6% is strong and
compares favorably with the national average of 13% . The city continues to be one of the most affordable
places to live, with the local average home price currently 20% below the national average.
Mortgage rates unequivocally have played a major role in the housing boom. We’ve just witnessed mortgage
rates at 45-year historic lows, and now we’re watching a slight, but reasonable, increase in home financing
costs. What is significant to continued growth in housing is the favorable mortgage servicing cost-to-income
ratio, which in Atlanta is 12% , well below the local historic average. This solid rate shows no financial
overstretching to purchase a home. Better yet, this rate indicates the potential for a healthy increase in
home prices.
In all markets, the baby boomers have just approached their peak earning years, signaling the buying of
more expensive primary residences as well as purchases of second or retirement homes. The tax benefits of
home ownership, in particular the 1998 legislation, allow primary owners to trade down without negative tax
consequences. Long-term capital gains tax rates were reduced two years ago, resulting in a higher return for
home investors.
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