Can Housing Industry Sustain Sellers' Market?

Sales of existing homes set a record in June, and home prices are rising at the fastest pace in nearly 25 years. Douglas Duncan, chief economist at the Mortgage Bankers Association, remarks on the state of the U.S. housing industry.

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STEVE INSKEEP, host:

Next, we're going to examine why the housing market remains so strong. There's been plenty of talk about a housing bubble and that has not stopped people from paying more and more. Sales of existing homes reached a 25-year high last month. To try to find out why, we asked Douglas Duncan to join us. He's the chief economist at the Mortgage Bankers Association.

Welcome.

Mr. DOUGLAS DUNCAN (Chief Economist, Mortgage Bankers Association): Thank you. Thanks for having me.

INSKEEP: So what is driving prices even higher?

Mr. DUNCAN: I'd say it's three fundamental things. One is the supply of homes remains very modest by historical standards. Two, the increase in population and the drive of demographics with the boomers keep demand growing rapidly. And, three, interest rates remain at historic low levels.

INSKEEP: Isn't there a point, though, at which people will say, `I'm just not going to pay this much or I just can't pay this much'?

Mr. DUNCAN: Absolutely. There has to be in the long run some relationship between household incomes and house prices, especially if the interest rates start to rise. House prices in the US are appreciating at somewhere around the 12 to 13 percent rate, annually. Household income is not rising nearly that fast. It is rising, and employment's increasing. Both of those give support for the housing market but it's not rising at the pace of house prices.

INSKEEP: You represent mortgage lenders and some mortgage lenders have been accused of fueling the increase in housing prices by offering more and more creative, and, some would say, dangerous lending tools, interest-only loans, for example.

Mr. DUNCAN: Well, I'm not sure that anybody wants to stop innovation that serves consumer demand. Now whether or not individual consumers have fully understood products and work through the implications for them I think is an important question and we have some evidence that some consumers only talk to one lender. There are about 8,000 of them out there. If you shop three or four lenders, you're likely to get good comparisons and a better understanding of how products work.

INSKEEP: Is it likely that there are consumers who are in such desperate situations, they need a house, they need a bigger place to live, expanding family, or they're just moving and they have to go for the high-risk option because they don't have the credit or the income for anything else?

Mr. DUNCAN: Well, there's no question that there are some consumers that are not qualified for mortgages, and, I think that, irrespective of whether you want to buy one, if you haven't in the past shown a good pattern of credit management, ability to maintain steady employment that would be required to be able to support a mortgage, I think then renting is probably an option, and, in fact, rents are very good in many of these same markets where house prices are very high.

INSKEEP: Douglas Duncan is chief economist at the Mortgage Bankers Association. Thanks.

Mr. DUNCAN: You bet.

INSKEEP: This is MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE (Host): And I'm Renee Montagne.

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