Business Week online
Date: August 23, 2006
Article: "Where the Housing Boom Lives On"
Author: Christopher Palmeri and Douglas MacMillan


Despite lower earnings from builders like Toll brothers, national data indicate that many local real estate markets remain strong.

Toll Brothers opened the door to some bad news. The nation's leading builder of high-end homes reported on Aug. 22 that its net income fell 19%, to $175 million, in its fiscal third quarter.
That's down from its record of $215 million in the same period last year. Worse, the company said it expects its sales of new homes to fall by a similar amount in 2007, to as few as 7,000 units for the year. "The continuing malaise in the housing market is the result of an oversupply of inventory and a decline in confidence," company Chairman and Chief Executive Robert Toll said. "The speculative buyers of 2004 and 2005 are now sellers."

Investors fixed on the gloomy news would think the sky is falling from the housing market. But that is not necessarily the case. What builders such as Toll (TOL) are mostly experiencing is a decrease in units sold. The company's average home price isn't declining anywhere near as dramatically. In fact, in most U.S. cities, home prices are still on the increase. Of the 151 metro areas tracked by the National Association of Realtors (NAR), 37 showed double-digit increases in prices in the second quarter. Only 26 cities showed price declines.

Geographically diverse builders such as Toll can get dragged down by the volume of sales and slowing national pricing trends, but there are still plenty of local markets where home prices remain strong. screened the latest data from the NAR to find the 10 cities with the highest home-price appreciation in the second quarter. To weed out markets that were undervalued to begin with, we only looked at cities that had median home prices higher than the national average of $227,500.

Nationally, home prices increased 3.7% in the second quarter. But these tenacious 10 all saw prices climb at a pace at least three times that level. They're led by the Virginia Beach/Newport News (Va.) area, which saw its median sale price jump 23%, to $237,000. It was followed by Portland, Ore., and Tampa, each of which had price appreciation in the neighborhood of 19%.

In many cases, these cities are experiencing decreases in the actual number of homes sold. In Tampa, for example, the number sold has fallen 21% through July, to 10,696 homes. But the average sale price increased 23%, to $284,000.

What's keeping home prices rising varies from city to city. In Portland, restrictions on growth limit new construction. Employers such as Intel (INTC) and Genentech (DNA) continue to expand. "Portland has done a lot to attract the creative set—graphic artists, film makers, and such," says Jane Leo, director of government affairs for the Portland Metropolitan Association of Realtors. "If you have that job creation and no new land to build housing, that drives the price of the existing stock."

"Our current inventory is about 2.6 [months' worth of unsold homes], which is very low in comparison to what it should be for a healthy, neutral environment," says Roberta Nopson, a broker at the local RE/MAX affiliate in Portland. "Starter homes are being replaced by town homes and condos because there's nothing under $200,000 for a first-time buyer."

In Philadelphia, Center City is thriving. Even as the city as a whole loses population, urbanites want to flock to the historic core where new construction is little or nonexistent. Home prices in Philly increased 11.5%, to an average of $235,000. "Philadelphia's been bucking the trend," says Gregory Damis, with local firm Prudential Fox %26 Roach. "It's hard to explain. But when you compare us to Boston, New York, and Washington, D.C., we're undervalued."

Of course the poorer result posted by home builders such as Toll may also be due to the fact that they've largely been chasing the higher end of the market. Virginia Beach has a younger population that's continuing to snap up homes priced in the $200,000 range, says Paul Parker, a local broker at Coldwell Banker. "The upper price points are experiencing some stagnation," he says. "Just about every builder imaginable is building a five-, six-, seven-, eight-hundred-thousand dollar product."

Americans are showing that they still want to own a home of their own. They're just not chasing them like they used to.

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