Posted on: Friday, December 3, 2004

U.S. home prices keep rising

By Kathleen M. Howley
Bloomberg News Service

U.S. home prices increased at the fastest pace in 25 years during the third quarter, led by Nevada and California, as the economy improved and low mortgage rates made financing more affordable.

Prices across the nation rose an average of 13 percent from a year earlier, surpassing the second quarter's 9.8 percent pace, according to a report from the Washington-based Office of Federal Housing Enterprise Oversight, or OFHEO, released Wednesday. It was the biggest gain since 13.1 percent in 1979's third quarter.

A stronger job market coupled with low mortgage rates made it possible for buyers to bid more for a property, said Joe Carson, director of global economic research at Alliance Capital Management Holding LP. Rates will probably climb to an average of 6.01 percent in 2005, up from 5.85 percent this year, Fannie Mae, the largest U.S. mortgage buyer, has forecast.

"You don't kill a housing cycle with job creation, low rates and very favorable tax laws," Carson said.

"Maybe the fastest rate of price appreciation now is behind us, but it's likely to remain above people's expectations because it will be slowing from this level."

Home-price appreciation probably will slow to 8 percent in 2005 from 9.7 percent this year, according to Freddie Mac, the second-largest mortgage buyer. Over the past 20 years, the average U.S. price gain has been 4.5 percent, Lawrence Yun, an economist at the National Association of Realtors, said.

Prices in Nevada surged 36 percent, driven by the Las Vegas-Paradise area's 42 percent gain. Hawai'i had growth of 28 percent, California saw 27 percent and Washington D.C. recorded 24 percent.

"I think there are markets that are fragile," Amy Crews Cutts, a Freddie Mac economist, said. "I don't believe that Las Vegas' 42 percent is sustainable for a long period of time."

In fast-growing markets, a price "correction" probably will come in the form of a slowdown in appreciation, rather than falling prices, she said.

"In order to have price reversals, you've got to have huge job losses," she said.