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The investment of the moment

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The astonishing rise in home prices in Babylon, a quiet town just inside Suffolk County in the western portion of Long Island, has even realtor Mary Adams drawing her breath in amazement.

Three years ago, the average cost of a single-family home that Adams, who is managing partner at Century 21 Herrick Real Estate, sold in the Babylon area would cost upwards of about $180,000. Today, Adams says few homes in the area sell for less than $300,000.

“It boggles my mind,” Adams said. She attributes the eye-popping growth in home prices to record-low mortgage rates and a steady influx in recent years of younger families seeking the sort of peaceful suburban lifestyle that Babylon offers its residents.

“We’re seeing younger people with more money move into the neighborhood,” said Adams. “And people who bought homes a few years ago are trading them up for more expensive ones because the rise in the value of their homes has given them more buying power.”

As the U.S. housing market continues to demonstrate astounding growth — despite the struggling stock market and economy — a handful of regions, particularly in the Northeast and on the West Coast, are showing remarkable growth in home prices.

A confluence of unique factors — including record-low interest rates, stable unemployment levels and a tight supply of available homes — have come together to push home prices up to astonishing levels, fueling the debate over whether a U.S. housing “bubble” is forming.

One of the fastest-growing real estate markets is New York’s Long Island. Here, the median price of a single-family home rose an incredible 29.6 percent to $307,200 from the second quarter of 2001 to the same period this year, according to the National Association of Realtors, an industry trade association.

Other regions of the United States are seeing similarly startling home-price growth, including San Diego, where the median price of a home jumped 21.3 percent in the 12-month period ended in June, Washington, D.C., where the median price rose 20.8 percent, and Providence, R.I., where the cost has climbed 20.7 percent.

“These price increases of over 20 percent are phenomenal,” said Lawrence Yun, senior economist at the National Association of Realtors.

Yun attributes the massive growth in home prices to soaring land costs, a scant supply of available homes, strong demand for housing from immigrants and a relatively steady labor market.

Another, more publicized reason, is the fact that interest rates on home loans are at 40 year lows, prompting many Americans to refinance their mortgages and buy new homes in record numbers, according to the Mortgage Bankers Association of America.

“With interest rates so low, many more people are applying for mortgages and many more can qualify for them — that’s really stimulating the nation’s top five markets,” Yun said.

All of these factors apply in the case of Long Island’s Suffolk and Nassau Counties, where the median home price has risen by 22 percent from 2001 to 2002 according to Dr. Pearl Kamer, chief economist at the Long Island Association, a regional business association.

A limited amount of available land has reduced developers’ ability to construct new homes on Long Island to meet a growing demand, Kamer explained. “This is a mature housing market, with a fixed supply of homes, so you’re seeing strong demand push up against short supply,” she added.

In other parts of the nation, where the demand for new homes is similarly strong, housing hot-spots like Orlando, Fla. and Las Vegas are able to match the strong demand for homes by building new ones, said David Seiders, chief economist at the National Association of Home Builders.

“Everyone wants to live in the Northeast or on the West Coast, and land use in these areas is getting constricted as a result,” Seiders said. “A shortage of land means there’s an upward pressure on the cost of building and on the cost of homes, but in other areas where they have strong growth, they also have the land.”

Long Island’s economy has managed to remain relatively impervious to the economic troubles bothering neighboring New York City, where unemployment persists, particularly in the financial services industry, and retail sales and tourism continue to struggle.

On Long Island the jobless rate — now 4.3 percent — has held relatively firm, keeping demand for housing strong. This contrasts with other hot housing markets, like the San Francisco Bay Area, where demand has slowed, due in main to a flood of job losses after the dot-com meltdown began in 2000, said Lawrence Yun.

“Home prices in San Francisco are still mind-boggling, and that’s attributable to a lack of home construction, but the housing market there isn’t doing as well as other places because the decline of the high-tech boom put a lot of people out of work,” said Yun.

On Long Island, the strength of the housing market may be storing up problems, says Pearl Kamer, who says a “housing bubble,” fueled by record-low interest rates and high real estate values, may be forming.

“A market like the one we have now is a red flag,” Kamer said. Low interest rates are creating a false sense of security, she said, because consumers feel they are worth more, on paper at least. If unemployment grows or interest rates rise, many people may find that their houses are worth less than their mortgage, said Kamer.

There will eventually be a correction in housing prices, but as yet there are no clear signs that a housing bubble is forming, Kamer said. “The market is still going great guns,” she added.

But while most experts say that the overall housing sector is strong, they also say the market for high-end homes may be slowing, predicting housing growth will slow during the rest of 2002, after breakneck pace seen in the first half of the year.

There might already be signs of this in Babylon. At Century 21 Herrick Real Estate, Mary Adams says she is starting to see high-end properties take longer to sell, and in some cases buyers are becoming a little bit more conservative.

“They are thinking, rates are low, but they might go lower,” said Adams. “The hot properties are still going to sell, but instead of selling in two weeks they are taking four weeks to sell.”