Through The Roof!

When Matt Morgan toured the French Provincial home in Seattle's quaint Bryant neighborhood last March, he anxiously noted the pile of brokers' business cards on the dining-room table. In Seattle, where too much money is chasing too few for sale signs, homes are being auctioned off like Picassos, and lots of cards signal lots of potential rival bidders. So Morgan, a 37-year-old Web-page designer, offered to pay $315,000--a full $35,000 over the asking price. No dice: another buyer outbid him. He quickly moved on to a charming Cape Cod. It was priced at $269,000, but Morgan bid $307,000. Again, someone else topped him. Disappointed? Sure, but also undaunted. In these times, he who hesitates remains apartment-bound. "It's harsh," Morgan says. "You have to act fast, roll up your sleeves and fight."

Let's have a moment of silence, please, for desperate buyers shopping amid the tightest housing market in years. OK, now you homeowners can let out a cheer. Home values are on an unprecedented tear that, for the average American family, has bolstered bank accounts far more than the stock market. Driven by interest rates near 30-year lows, solid job growth and high consumer confidence, a record 6.6 million families will buy a home this year, often at prices higher than they ever dreamed they could afford. For sellers, windfalls await: in the last three years, the average home seller has netted $35,000 in profits--not bad, considering that the typical home sells for $131,000. The rest of us are doing well, too. Together we're sitting atop $1.2 trillion in unrealized gains. That good news has been eclipsed by the long bull market in stocks; with no Dow Jones Real Estate Average to drive headlines and no quarterly statement showing your home's value, there's a stealthiness to this brick-and-mortar boom. But as our '90s prosperity bounds toward the millennium, economists say the "wealth effect" from the benevolent housing market deserves equal billing alongside the more celebrated bull.

That's the good news. Here's the bad: some of those same experts are getting nervous. Consider just a few recent signs of a market run amok. The First Family is now looking at rentals outside New York, where even ex-presidents can't afford to buy. And Jerry Seinfeld, worth $225 million, recently lost a bidding war for a Hamptons proper-ty. It's not just mansions. In Los Angeles, prices rose by 8 percent last year; in Boston, 9 percent. In the hottest neighborhoods, double-digit gains are common. It's approaching a "feeding frenzy," says broker Gerry Fitzpatrick of ReMax Southeast in Denver, where some prices are jumping 4 percent a month. Says Wellesley College economist Karl Case: "It's starting to look more like the '80s," when wild speculation in several major markets drove prices to unsustainable levels. Nobody is predicting a real-estate meltdown just yet. But as prices ratchet ever higher--experts expect home values to climb at least an additional 5 percent in most cities by next summer--so do the odds that we could revisit the market of the early '90s, when employment slumps made prices plummet. Buyers, beware.

Borrowers should, too. Part of what's driving the hot market is a fundamental change in lending practices that has made it far easier for previously unqualified people to get mortgages. Lenders eager for new business have relaxed credit requirements and now compete by using aggressive ad-vertising that, in one telling case, depicts a magician conjuring up attractive mortgage terms. At the same time, the once traditional 20 percent down payment is a near relic: in the nation's largest metro areas, more than half of the buyers now make down payments of 10 percent or less, according to Chicago Title. This lower stake both raises monthly payments and makes it more tempting to walk away from a house in tough times.

How eager are lenders to extend mortgages? Some now offer zero-down loans, while others will loan 125 percent of a home's value. Even established homeowners are taking advantage of the easy money: last year they siphoned $400 billion from their houses through home-equity loans, and experts say at least some are reinvesting that money in potentially risky ways. Many spent some of the money on home improvements, but less prudent borrowers converted a piece of their homes into new cars or Internet stocks. The danger: any loan that relies on a house as its collateral puts the house at risk of foreclosure if you can't make the payments. If home prices fall, those maxed-out borrowers will be underwater, with homes worth less than what's owed on them. Even if values hold, a recession could make hefty mortgage payments too much to bear for those who lose their jobs. Says Northwestern University real-estate professor Edwin Mills: "Even a slight recession can derail a family stretching to pay a 95 percent mortgage." For now, default rates remain comfortingly low, but that could change if unemployment rises. "When people aren't earning as much money, they'll realize they can't afford the homes they've purchased," says best-selling financial author Suze Orman. "Many will be sold at a fraction of the cost."

Those fears are miles away from the streets of Brookline, Mass., as agent Debbie Gordon steers her Jeep between listings, her two cell phones at the ready. Lately Gordon has been selling million-dollar homes to "sneaker millionaires," her nickname for Boston's young fund managers and silicon CEOs. Last week she fielded two offers on a $1.79 million brick Georgian in nearby Newton, which the current owners bought for $635,000 in the mid-'80s. She also listed a three-bedroom condo for $430,000; it had sold for $229,000 just three years ago. Ten miles west in Sudbury, sellers like Charles Bennett and Jill Philipson are amazed at what a hot market makes buyers do. In June they sold their Georgian Colonial to a couple who offered full price--$689,000--after just driving by. Says Bennett: "We were surprised that two people could fall in love with a house they hadn't stepped inside."

Tales like that are still unusual, but rising prices aren't. According to price trackers at Case Shiller Weiss, home values are climbing in 95 percent of ZIP codes nationally. Even in steady-Eddie states like Wisconsin and Iowa, prices are shooting upward. That coast-to-coast appreciation makes the '90s home bonanza different from the inflation-driven price spikes of the '70s or the wild speculation on the East and West Coasts in the '80s. Many experts say that the ubiquity of the gains, along with rising incomes to support the buying spree, means it's too soon to worry about runaway prices.

Optimists point to other reasons the housing boom has room to grow. "We believe that over the long run, demographics influence home sales more than the economy does," says Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. Immigrants and young echo-boomers will keep the ranks of first-time buyers--who purchase 46 percent of all homes--full for at least another decade, he says. The baby boomers will lend a hand, too. As they near retirement, they're already buying vacation homes at a record clip.

Sellers aren't the only ones making the most of the moment. As interest rates dipped to 30-year lows last fall, Americans refinanced roughly $700 billion in mortgages. That means they got a new, lower interest rate for their mortgages. The refinancing boom is part of a broader trend in which people increasingly use their homes as piggy banks to fund other purchases or investments. Houses have suddenly morphed from investments into investment tools. "Refinancing is so easy and cheap that how much equity you accumulate in your house is just a matter of choice," says Northwestern's Mills. "People are asking, 'How do I want to allocate my portfolio between housing and other investments?' "

For rick and vickie hall of Ann Arbor, Mich., the hot housing market makes investing more in their current home a smart bet. They love their house, but in what's become a national battle cry, they need more space. So last year they began a $125,000 addition, expanding the family room, kitchen and master suite. They're a small part of the reason that busy contractors aren't returning your calls. "Many people conclude, 'I like my neighbors and my kids like their school'," says Harvard researcher Kermit Baker, so they add on rather than buying new. Baker's research shows we spend a stunning $182 billion a year fixing up our old homes, almost as much as the $222 billion we spend on new ones. That's smart: rehabbers avoid the transaction costs of buying and selling, and avoid paying top dollar for another home at a market peak. To boost their return, some rehabbers now pay appraisers to help plan remodeling projects. The Halls abided by the rule that new kitchens and baths bring the biggest gains, so they expanded both. But they also know a house is about more than return on investment. Says Vickie: "Remodeling the family room, that's just for us."

That kind of calculus is a long way from what was once the predominant equation of home buying: don't spend more than 28 percent of your income on mortgage payments. To-day that seems quaint; many bankers now allow payments to rise to 33, 36 and, at times, even 50 percent of your income, a debt level that gives new meaning to the phrase "house poor." In this brave (or foolhardy) new world, your income is less important than the numbers that shoot out of lenders' "credit scoring" software, which uses complex mathematical formulas to discern reliable borrow-ers from deadbeats-in-waiting. "Scores measure how you've paid your bills in the past, and how much of your available credit you're using today," says Dave Shellenberger of Fair, Isaac and Co., the San Francisco firm that pioneered the technique. Credit scoring is having a huge impact. It's letting more minorities and "stable Mabels"--Shellenberger's affectionate label for lower-income families who fastidiously pay their bills--into the home market. But it's also driving prices higher by letting folks who could afford, say, $250,000 for a home a few years ago pay $300,000 today on a similar salary.

Even when they don't bend their credit standards, today's lenders go out of their way to help families who, a few years ago, wouldn't have qualified for mortgages. When Randy and Suellen Romero contemplated buying the immaculate, Spanish-style ranch they'd been renting in a middle-class suburb in Phoenix, Ariz., their fear of applying for a loan was a major hurdle. They assumed that lenders would frown on a big unpaid medical debt from Randy's past. But by the time they closed on their house in May, the Romeros--he's 35, she's 30--knew one key reason the number of U.S. homeowners has risen by 5.4 million in the last four years. In today's aggressive mortgage market, lenders want to make every loan they can. Des Moines, Iowa-based Norwest Mortgage, the nation's biggest home lender, says low housing prices, competition for mortgage business and subsidies from local governments currently make Phoenix the best place in the United States to be a first-time home buyer. Case in point: Doug Johnson, a Norwest loan officer in Phoenix, showed the Romeros how to clean up the factual errors on their credit report. He also helped them land a new loan to wipe out the old debt and got approval for a mortgage that required the couple to put down only 3 percent of the home's $90,000 purchase price. "I feel so lucky," Randy says. "I didn't think this could happen." After their closing, a thrilled Randy did what he had waited through six years of marriage to do: he carried his bride across their threshold.

Bringing all these new families into homeownership is a proud American tradition. But some experts fear that the millions of newcomers could be especially stressed if the economy turns south. What would it take to trigger a serious rise in mortgage de-faults? Declines in corporate profits proba-bly wouldn't rock the boat--unless compa-nies decided to dump workers. Historically, rising unemployment forces more hard-pressed families to turn in the keys. As their loans go unpaid, the value of their mortgages held as investments (mainly by institutions) sinks. Even experts who are calm about rising home prices worry about the profligate lending. When a recession hits, says UCLA real-estate expert Stephen Cauley, "we'll see a lot of people walk away from their homes." Adds RFA economist Mark Zandi: "There will be a lot of mortgage lenders who will go out of business."

There's no evidence that the investors who buy mortgages in bulk fear a crisis in which large numbers of homeowners can't make their payments. But, as with the stock market, some of those investors are starting to ask whether housing has overheated. "There's definitely a concern across the entire mortgage market," says Andrew Jones, who oversees ratings of mortgage-backed securities for Duff & Phelps. But Jones also stresses that with the economy strong, the mortgage market remains calm. Home buyers, too, are staying the course: home sales in June were 9 percent higher than a year earlier. Experts say the recent rise in mortgage rates--up 1.2 points since their fire-sale low of 6.49 percent last October--hasn't slowed buyers much, though Alan Greenspan's recent threats of further Fed tightening might. Nor is it clear that a plunge in the stock market would have much effect; economists say that outside New York, where Wall Street money drives home values, stock gains don't greatly affect real-estate prices. A modest stock-market decline could actually help the housing boom, says Fannie Mae chief economist David Berson, by easing pressure on the Fed to raise rates--and helping the good times last a little longer.

Matt Morgan, the persistent Seattle house hunter, likes that kind of happy ending. After being outbid on two homes, Morgan switched tactics. When he heard about a third promising listing, he hustled to be the first buyer through the door. He schmoozed the sellers and their agent. "I got on their good side," he says. When the bidding began, he offered a scant $10,000 over the $270,000 asking price. But the sellers, who clearly liked him, accepted it without considering other offers. As he finishes unpacking, Morgan shrugs off worries that the market is overheated. We're in a New Economy, he says, where the boom times will last. "It's not just hype," he insists. As millions of us load our lives into moving vans this year, let's hope he's right.