Housing sales in Atlanta were strong again last year, as was construction.
That's good news, or it would be if those two trends weren't out of kilter just enough to cause concern in the industry.
Building is outpacing sales, so the number of new houses that sit unsold has been growing.
At the same time, some critical components of a solid real estate market are faltering. Interest rates are rising, population growth is slowing and the gap is widening between home values and incomes.
Unchecked, these trends could lead to trouble.
"At some point, you end up with more houses than people want," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "You are building almost twice as many homes as are needed."
Nationally, too, there has been an unprecedented surge in sales -- enough to make some economists call it a "bubble." By definition, bubbles -- like the stock market of the 1990s -- are unsupported by fundamentals and destined to burst.
Part of the good news for Atlanta is that the worst of the housing bubbles are elsewhere.
In Nassau and Suffolk counties, just outside New York City, prices have surged 88 percent in five years. On Cape Cod, home values have more than doubled. In contrast, the average metro Atlanta home price has risen 31 percent, Baker said.
But, while the symptoms are far less severe here, Atlanta is not immune.
"I think in Atlanta there will probably be a cyclical downturn, not a collapse," Baker said.
At least in the short run, Atlanta's market seems more firmly tethered to fundamentals than frothier regions like California, metro Boston and New York.
Most basic is the link between home prices and incomes. Values often get out ahead and stay there -- for a while. Sooner or later, experts say, income must catch up. In the worst-case scenario, the bubble pops, prices fall and some homeowners get whacked. In the most benign case, price increases slow but never drop.
Atlanta seems to be sliding into the best-case scenario, said Nicholas Retsinas, director of the Harvard Joint Center on Housing Studies in Cambridge, Mass.
"There is clearly a softening in the Atlanta market," he said. "There has been a substantial slowing in the rate of [home price] appreciation in metro Atlanta. And it is good news in Atlanta that it's slowing."
Whatever happens to other, hotter markets, Atlanta should not crash, he said.
That doesn't mean there won't be price declines in some areas and some neighborhoods. But the market as a whole should be healthy, Retsinas said.
That isn't the best news if you are a home seller -- especially if you haven't owned your home long. And it's not good news if you have recently refinanced and are looking to do it again.
But it's good for the region's economy. And if the economy keeps improving -- adding jobs and improving household finances -- that should help fill the gap between incomes and home prices.
Indeed, there are signs of a soft landing, said Richard Hearin, senior vice president at Coldwell Banker Builder Developer Services. "I am not seeing a significant increase in inventory right now in [unsold] new homes. A slight uptick but not anything I would consider noteworthy."
Builders -- more than ever before -- can respond quickly to market signals, he said, because information is better and available more quickly. And the consolidation of the industry means that fewer builders must react.
"I think to some extent that builders are more sophisticated than before," Hearin said. "They recognize the need to build something that has a buyer for it."
The brakes are already on, he said.
Supply, demand
Even if incomes rebound, there must be enough people -- and enough jobs and decent paychecks -- to soak up the supply of homes.
While the two-decade-long flood of new residents into Atlanta has subsided, there has been no sign yet that construction has slowed to match.
The region added 57,700 people in 2003, vs. the 85,000 annual average since 1990. That translates into 21,774 new households last year.
In contrast, in the past three years the region added an average of 44,416 housing units a year, more than two-thirds of them single-family houses.
The Atlanta area is expected to maintain that more leisurely growth rate, adding 534,621 people during the decade ending in 2010, or about half the growth of the 1990s, said Bart Lewis, chief of the research division of the Atlanta Regional Commission.
The biggest unknown in the local population trend is, what will retiring baby boomers do?
Because they are more affluent than previous generations, baby boomers are expected to buy second homes as they near retirement. But then, will they stay in places like Atlanta? And if they do, will they downsize to condos? Will they shift from suburbs to city?
"That is the most significant demographic event -- and the hardest to understand what will happen," Lewis said. "It is going to create major changes which nobody can anticipate perfectly."
Atlanta in the past lost a large portion of its over-60 citizens, but the rate of loss has been slowing, he said. "The region is going to become relatively more attractive to older, retirement-age people. And that could make a huge difference in the labor force and migration." In that mix, are there signs of a market tipping into trouble? No way, says Ian McCarthy, president and chief executive officer of Atlanta-based Beazer Homes, the nation's sixth-largest builder.
"We know the demand is there," he said. "We know the population is growing."
Neither nationally nor in Atlanta is there reason to fret, he said. "The fundamentals are incredibly strong. The real driver of housing is not interest rates. It is people, population growth and household formation."
40,000 listings
More than 40,000 homes in metro Atlanta were listed last quarter as unsold by Smart Numbers, representing well over half a year's worth of sales. Many are in metro Atlanta's fastest-growing counties.
The most stunning growth last year in housing, and often in unsold houses, was in less densely settled areas farther from the city of Atlanta and the intense developments to the north.
Douglas County grew the fastest, showing a 36.2 percent surge in new home sales. Close on its heels was Rockdale, growing 33.9 percent. But the total number of new houses sold in both -- 1,771 in Douglas and 865 in Rockdale -- pales in comparison to Gwinnett's 8,651 new houses.
Prices often kept pace.
The greatest escalation in new home prices last year was in Newton County, where they jumped 10.1 percent. For resales, the fastest price boosts came in Forsyth -- 9 percent.
Forsyth had the highest median price for all home sales -- $219,500 -- and the highest for resales.
The best window to the larger market may be in these fast-growing "crescent counties" from Douglasville east to Rockdale, Hearin said. Right now, those counties have more unsold inventory than is typical, he said.
Even in a good market, there is typically at least a slight mismatch between supply and sales -- often several months' worth of housing.
But when that unsold inventory stretches toward a year, that's a sign of a market out of balance. Several suburban counties have unsold inventories reaching toward that benchmark: Fayette has a 10-month inventory of new homes; south Fulton's is 10.1.
"What you need to do, to see whether they are absorbed at an acceptable place, is watch this for the next 12 months or so," Hearin said. "If it is not absorbed, then we will end up with an overbuild."
