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RISMEDIA, Sept. 13, 2005 — (KRT) — A $1 million building permit issued to construct a single-family house in Wrightsville Beach, North Carolina; investors vying to get in on pre-construction deals; a neighbor's house sold in hours, another in just days; bidding wars escalating asking prices.

The question every investor, every homeowner, everyone who develops or builds wants to ask, but may be afraid to: Is there a housing bubble in Southeastern North Carolina?
If so, when will it pop? And if it pops, what is the fallout? In 2000, investors watched their fortunes and retirement savings evaporate when the tech stock bubble burst. Now, with home prices reaching for the stars, and Realtors bemoaning a scarcity of million-dollar properties, some are questioning whether a real estate bubble exists and if it exists, will Gotterdammerung ensue?

Fed Chairman Alan Greenspan did nothing to quell speculation when he sounded a cautionary note recently, saying several housing markets were "frothy" and "speculative fervor" might exist. It wasn't very long ago investors may remember, when the market scoffed as Greenspan issued his "irrational exuberance" statement just months before the tech bubble burst.

Some areas of the country may be approaching bubble status—when available land diminishes in direct proportion to population expansion. The real estate market has begun to cool in parts of the United States, particularly coastal California and Florida where some homes are overvalued by as much as 60 percent.

Ray Owens, vice president and senior economist with the Federal Reserve Bank in Richmond, Va., said he doesn't think the run-up in home prices are based on speculation.
The housing market is strong, he said, because the supporting factors are strong—hence, no bubble. Incomes are rising, the job market is strong, mortgage rates are low and the government has passed favorable tax treatments.

This year Richard DeKaser, senior vice president and chief economist at National City Bank in Cleveland, studied 299 housing markets—comparing cost of housing to household income. He used price-to-income ratios, mortgage interest rates, relative income levels and characteristics unique to each metro area.

As of the first quarter of this year, he found, 53 metro areas representing 31 percent of the total U.S. housing market are "extremely overvalued and confront a high risk of future price correction." Those markets were in California, Florida, greater New York and greater Boston. In Wilmington, for example, DeKaser found that the price of housing runs about 2.25 times income—a fairly conservative ratio. Compare that to an area in Florida or California, such as Santa Barbara, that have seen home values soar.

There, homeowners pay about 5.3 times their income for a home. And while the average family income is $106,112, the median price of a home is $564,000.

Even low interest rates can't take the sting out of that type of bite of a family's budget.
Some analysts believe that if indeed there is a bubble, it will not pop, but merely shrink as real estate properties go through a price/value readjustment.

In January, Owens told civic leaders in Wilmington he did not see a real estate bubble in this market.

That's good news for the estimated 28,000 people employed in this area in real estate, construction and allied businesses. He said last week, however, that that doesn't mean home prices will continue to escalate. As sellers continue to test the market, the market may react by pulling back, Owens said.

Tim Milam, owner/broker of Coldwell Banker Sea Coast Realty, doesn't see a bubble on the local real estate scene.

Milam, who has been in the real estate business here since 1992 and weathered the 2001 recession and a slew of coastal storms, believes this area still provides lower home prices compared with other parts of the United States.

Prices are low enough, relatively, to make the region attractive as a second-home market, he said. While the beaches have attracted North Carolinians from the Triangle and the Triad for decades, New Englanders and Californians have discovered this area as an attractive vacation destination.

Waterfront prices are steep, he admits, but those properties are in limited supply.
But golf course homes are also attractive and Brunswick County, he said, is exploding. Even non-golfers are buying in golf course communities such as Castle Bay in Hampstead. Some people buy for bragging rights, he said. Others because they know that the land behind their homes will be open space and not developed.

So what is the state of real estate in Pender, New Hanover and Brunswick counties?
Donna Girardot, is chief executive of Business Alliance for a Sound Economy and government affairs director for the Wilmington Cape Fear Home Builders Association.
"There is no bubble," Girardot said.

Southeastern North Carolina is not overdeveloped, she said, adding, "to me that says, you have too much residential or commercial development out there."

It's a matter of supply and demand, she said, and the real estate market still absorbing housing stock what we have.

The real estate market, she believes, hasn't "topped out yet." William Hall Jr., an economist at the University of North Carolina Wilmington, is a little less sanguine.

Hall, without sounding an alarm, said that, even though he doesn't think this area is in danger of a real estate bubble, people wouldn't know there was a bubble until they tried to sell their homes. A housing bubble, he said, is different equity market bubble—stocks are more vulnerable faster to negative market forces and they are easier to sell.

But, he said, if there is a market that might be vulnerable, it is the second home market in Brunswick County. Vacation homes, those east of U.S. 17 and close to the beaches, are vulnerable to "flipping." Flipping property has gotten some notoriety recently as investors buy houses with the intention of a quick sale or collecting rents. Hall feels that the Federal bank may begin to cut back on "exotic mortgages." Some, like interest only loans, have gone a long way toward encouraging a building boom. If mortgage money tightens, he said, the housing market could cool, not bust.

DeKaser, in his report wrote, "If home prices are overvalued, then by definition, the risk of a price correction is high. In the event that such a correction plays out with home prices falling broadly, adverse implications abound."

When home prices fall, only those who want to or have to sell their homes are immediately impacted. If a home sells for less than it was bought for, the seller has to make up the difference—losing real wealth in the process.

Mark Imperial is a professor of public administration at UNCW. He said higher home prices means higher taxes. People on fixed incomes are usually the ones who feel that pinch. He has documented an interesting trend --long-time residents are selling their homes on Wrightsville Beach for much more than they paid for them. Some, he said, could be banking part of the money and buying another home on another beach, probably in Brunswick County for a lot less money. The same thing is beginning to happen in Carolina Beach and Kure Beach.

If prices drop, what would happen to the new million-dollar and multi-million-dollar home market?

Probably not much. Those who are building these types of homes, Imperial said, can afford them. They aren't usually built as rental properties because the market wouldn't bear a price high enough to cover the mortgage payments.

But what may be the toughest impact and hurt the most, is that home building would decline. While homebuilding may not be the economic backbone of this region, it is a significant player.

The only dark cloud on the horizon, or at least a question no one can answer at this point, is the economic impact from Hurricane Katrina. Girardot said the market may slow a bit, building supplies may increase in price, and subcontractors may leave this area to go South to help in the rebuilding effort.

As for the near future, Girardot said home buyers can "look up and down the East Coast and find this area is still a bargain."