The Beechwood Organization recently broke ground on an 88-unit housing complex in Smithtown with units selling for $400,000 to $450,000. Already, 65 of those homes are spoken for. Michael Dubb, president of the Jericho-based firm, sees the same pattern at projects in Miller Place and Dix Hills. “I’m selling up to 75 percent of my projects before a shovel hits the ground,” Dubb said. “We just keep going. Supply and demand are out of kilter,” especially for new homes.
But prices of older homes also continue to soar. In May, the average price of an existing single family home on Long Island hit $299,400, a 25 percent increase overthe same period last year.
So when will the Island’s housing boom end?
That depends on which economist you speak to and which trend line you choose to focus on. The housing bulls note that mortgage interest rates are near 40-year lows and banks have eased their downpayment terms for buyers.
Also, available land for new homes is increasingly scarce and expensive on Long Island even as demand is likely to remain strong. The Joint Center for Housing Studies at Harvard University reported this week that the number of U.S. households will grow 22.9 percent over the next two decades – nearly as fast as the household growth rate during the booming 1990s.
But there are signs the rapid runup in prices may be near an end. The National Association of Home Builders forecasts that mortgage rates will begin edging up to 7.3 percent by the end of the year from 6.8 percent today.
Also, Frank Markey, an economist for Economy.com, believes Long Island is headed for a wave of negative migration that could cool both the regional economy and the housing market.
Throughout the early and mid 1990s, Long Island lost business and population to markets that were less expensive and offered greater opportunity. It was only after the Island’s economy had redefined its focus from military-industrial to service and high tech (coupled with greater governmental incentives) that the migration tide begin to flow in its favor.
Between 1998 and 2000, Long Island had a net influx of nearly 19,000 people.
But that gain slipped to a scant 100 people in 2001, and Markey expects it turn negative at least through 2006 (negative 6,900 in 2002). His explanation: the remainder of the country will soon catch Long Island in jobs growth, and Long Islanders will be drawn to those new opportunities, cooling demand for housing here.
But few if any economists say Long Island housing prices are poised for a serious collapse on the order of the tech stock decline that began in April 2000.
Stanley Duobinis, director of forecasting for the Washington-based NAHB, said there is no bubble on Long Island. In fact, he said, it is still recovering from the last recession.
“In the early 1990s, prices actually went down,” he said. “That is very unusual (in any economy).”
Duobinis said demand is being propped up by limited development and by the recent positive migration to the area.
First quarter job growth slipped to .5 percent from the 3.5 percent of 1999 and 2.3 percent in 2000, but it remained positive.
In that regard, the Long Island market has little in common with San Jose, Calif., which experienced a collapse in home prices after the area lost 8 percent of its jobs in the tech meltdown. But even in San Jose, home prices are rebounding.
Long Island, on the other hand, reported employment growth of 7,200 jobs in May, compared with a 9,500 gain in the 2001 period. That’s helped fuel housing starts, which hit 5,700 last year, a level the region is expected to maintain for several years.
Meanwhile, most of the 70,000 acres of farmland and open space now available for development will be spoken for by 2010, driving prices higher.
Three of the factors that have fueled recent demand for homes are low mortgage rates, aggressive lending practices and the growing sense that homes are a better investment that the volatile stock market.
Lenders are requiring borrowers to put down 5 percent or less for mortgages, according to Irwin Kellner, Weller Professor of Economics at Hofstra University. “It used to be 10 percent to 20 percent down,” he explained.
But as prices escalate, some homeowners who considered selling to move up to a better place are leery about letting go of what they have.
“Prices get above a certain point where the home being sold can’t be replaced,” said Steve Laposa, director of real estate for PricewaterhouseCoopers. “They’re pulled from the market, which further inflates demand.”
Dubb said it boils down to supply and demand. “The problem is in a region with close to 3 million people there is not enough new product”.