CEO dismisses talk of real estate bubble
URBANA – If you're harboring any notion of a real estate bubble, Jim Gillespie would like to pop it.
"Bubble" is the term some people use to describe a market in which prices are too high to be sustained. The "tech stock" bubble burst almost five years ago, and some folks fear today's high-flying home prices may presage a real estate bubble.
Gillespie, the president and chief executive officer of Coldwell Banker Real Estate Corp., begs to differ. Since the Federal Home Loan Mortgage Corp. began tracking real estate prices in 1950, "there's never been a year where prices have gone down," he said.
For a bubble to occur, there would have to be a massive oversupply of homes coupled with severe job losses – and Gillespie doesn't see either on the horizon.
"There aren't enough residential units to meet demand," he said.
Gillespie, a 1967 University of Illinois graduate, was back in town last week to help celebrate the grand opening of Coldwell Banker Devonshire Realty's office in Urbana's Stone Creek Commons.
During his visit, he pointed to four demographic reasons the national market for residential real estate will remain strong.
– First, baby boomers are still buying. The youngest baby boomers are just over 40 years old, and the eldest have yet to reach 60. They're not only buying new homes, but also second homes and investment homes.
– Second, minorities are shopping for homes. Gillespie said the percentage of minority households that own homes recently topped 50 percent for the first time.
– Third, the number of immigrants is increasing by 1.2 million to 1.4 million a year. They need homes.
– Fourth, the children of the baby boomers – the so-called "echo boomers" – are maturing. They range from 11 to 28 years old, and they have more money than previous generations of that age group. To them, real estate seems like a stable investment because they've seen "the stock market and securities go all over the place," he said.
Another demographic twist: Single females today account for one out of every five homebuyers. That's twice the rate of single males, Gillespie said.
Gillespie said home-price appreciation was greater between the second quarters of 2004 and 2005 than in any other year since 1980, according to the National Association of Realtors and the Office of Federal Home Enterprise Oversight.
The most rapid appreciation tended to be on the East and West Coasts and in Nevada, Arizona and Hawaii, he said.
In the nation's heartland, price appreciation was only 1 to 2 percent a year above the rate of inflation, he added.
In Champaign County, the number of homes sold is running about 100 units behind last year, but sales volume is greater because of price appreciation, said Charlie Younger of Coldwell Banker Devonshire Realty.
Gillespie acknowledged there could be real estate bubbles on a limited, regional basis, but he said examples of those have been few and far between.
From 1978 to 2003, a study of 362 markets detected 21 regional bubbles occurring in some market at some point over those 25 years, he said.
Gillespie said he doesn't expect rising interest rates to quash the real estate boom. He said the National Association of Realtors figures 250,000 to 300,000 buyers fall out of the market each time there's a 1 percent increase in interest rates.
Mortgage rates are now in the 5.75 percent range, and Gillespie said the "worst-case" forecast for next year is 6.5 percent. If that happens in the next 12 months, the number of real estate sales would drop from 7 million to about 6.65 million, he said.
"That would still tie for the second-best year in history," he said.
Gillespie said prices of new homes are bound to rise as a result of Hurricane Katrina.
"Massive building in the South is going to result in higher prices for new construction," he said.
Prices there are already on the rise.
A broker in Hattiesburg, Miss., recently told Gillespie that home sellers in her area are trying to get out of sales contracts so they can relist the homes for 25 percent to 30 percent more. They know people are looking for homes in the wake of Katrina's destruction.
Gillespie said an amazing 23 percent of all home sales are investment homes, and another 13 percent are second homes. The buyers are predominantly baby boomers, and two-thirds of the buyers are purchasing second homes within 300 miles of their primary residence, he said.
Though Gillespie has had a long career in real estate, that wasn't his plan when he was attending the University of Illinois. There, he majored in park and recreation administration.
When he graduated, he ended up teaching grade school at Ludlow and coaching track, baseball and basketball. He later taught at a private boys' school in Memphis, Tenn., and worked at the YMCA in La Grange before a friend encouraged him to enter real estate.
Today at Coldwell Banker, he's responsible for 3,700 offices and more than 120,000 brokers and sales associates.