Posted on: Wednesday, September 8, 2004
Growth in U.S. home prices expected to slow
By Andrew Ward and Kathleen M. Howley
Bloomberg News Service
U.S. home-price appreciation will slow as interest rates rise next year, according to Freddie Mac and Fannie Mae, the nation's two biggest purchasers of mortgage loans. The slackening may hurt economic growth.
Home prices rose more than twice as fast as wages over the past three years. Personal incomes rose 9.3 percent since 2001, and prices for new and existing homes surged 19 percent over the same period, government data show.
Homeowners "should not expect double-digit price increases year after year," Frank Nothaft, chief economist at McLean, Virginia-based Freddie Mac, said in an interview. "That's just not going to happen."
Five housing forecasters — Fannie Mae, Freddie Mac, the National Association of Realtors, the National Association of Home Builders, and the Mortgage Bankers Association — predict price gains will start to slow next year. None foresee price declines.
U.S. home price growth likely will moderate from 7.6 percent last year to 6.1 percent this year and 3.7 percent gain in 2005, said David Berson, economist at Washington-based Fannie Mae, the nation's largest buyer of mortgages. That would be below the 4.4 percent average of the past 20 years, according to the National Association of Realtors.
There are signs the run-up in prices already may be cooling. The median price of existing homes rose just 0.2 percent in July from June to $191,300 after surging 14 percent since February, and the median new-home price dropped 2.6 percent to $207,400.
Homes are the most valuable investment of many Americans, worth some $15.2 trillion. Slower appreciation may make homeowners less confident and eventually hurt spending, said Lyle E. Gramley, a former Federal Reserve governor and onetime chief economist for the Mortgage Bankers Association.
Through mortgage refinancing, owners last year turned a record $138.1 billion of home equity into cash, helping them buy cars, dishwashers and other goods.
"If the average slows to 4 percent to 5 percent, there'd be some negative figures in some parts of the country, and the confidence of those people would be shaken," said Gramley, who is now senior economic adviser to Schwab Soundview Capital Markets in Washington.
"People have been pulling money out of their homes, and they have been spending it," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "That source of demand will largely come to an end" as price gains ebb, reducing economic growth by about 1 percentage point, he said.
As interest rates rise, Freddie Mac's Nothaft estimates the borrowing homeowners do by refinancing mortgages — so-called cash outs — will fall 48 percent this year to $71.7 billion, a four-year low.
Freddie Mac and Fannie Mae are publicly traded companies whose origins trace to government agencies.
Federal Reserve Chairman Alan Greenspan in mid-August said policy makers don't have adequate data to tell whether the U.S. is in the midst of a speculative bubble in real estate price.
"House price increases have outstripped gains in income and rents in recent years," Greenspan wrote in a follow-up response to his July 20 congressional testimony. While that "raises the possibility that real estate prices, at least in some markets, could be out of alignment with the fundamentals," Greenspan added "that conclusion cannot be reached with any confidence."
Some Wall Street chief economists, including Stephen Roach of Morgan Stanley and Ian Morris of HSBC Securities Inc., say there's a risk that surging prices formed a bubble that could pop much as Internet stocks did in 2000.
"The biggest risk to this new strain of economic growth is the time-honored tendency of asset cycles to go to excess," Roach said in a July 14 letter to clients. "That was certainly the case when the equity bubble popped in early 2000, and could well be the case again for the property cycle."
An increase in interest rates may set that in motion, Baker said.
Among 68 economists in a Bloomberg News survey, just nine said they see signs of a national housing bubble, and Baker was one of three suggesting home prices may actually fall next year. Nine said prices would be unchanged.
Three-quarters of those surveyed said they consider houses overpriced in places such as Boston, Los Angeles, New York and Washington. San Francisco is another region they said may fit Greenspan's definition of "out of alignment."
The median price in San Francisco rose 20 percent in the year to July to $650,000, 11 times the median household income.
Else Townshend, a real estate agent since 1987, said one of her clients, a physician, has been unable to find a home even though she's willing to pay as much as $800,000. "She's made 20 offers, and she's gotten outbid on each one," said Townshend, who works for Zephyr Real Estate.
In Boston, the 11th largest U.S. metropolitan area, home prices rose 72 percent in the past five years, even as the region's unemployment rate almost doubled in the same period.
Karen Kirchoff, 47, is shut out of Boston's market. The acupuncturist can't afford to buy in the Roslindale neighborhood where she rents a two-bedroom apartment. "When I look at these prices, I don't think it will ever happen," she said.
Karl Case, an economist who tracks U.S. house values along with Yale researcher Robert Shiller, said he's worried about the surge in home prices.
For now, homebuilders say there's no shortage of buyers.
"What's driving demand is strong immigration, affordability and singles buying homes at a faster pace than ever," said Bruce Gross, chief financial officer of Lennar Corp., the third-largest U.S. homebuilder by stock market value. "Economics 101: Very strong demand and tight supply is leading to continued success for all the homebuilders."
Interest rates would have to rise at least 3 percentage points to affect housing demand, said Richard Dugas, chief executive officer of Bloomfield Hills, Michigan-based Pulte Homes Inc., the fourth-largest U.S. homebuilder.
