Home equity increases nearly 7%, new study says

Nation's Housing

March 12, 2000|By Kenneth Harney

THE EQUITY-building party rolls on for most of the nation's homebuyers and owners, even in the face of higher mortgage rates.

A comprehensive new statistical study of home values in 121 markets reveals that the typical American home increased in resale value by more than half a percentage point per month during 1999 -- close to 7 percent. Homes in nearly two dozen large markets gained in value at double-digit annual rates, some jumping more than 1 percentage point per month.

But can -- or should -- the home appreciation money-machine keep cranking out returns at this pace indefinitely? The author of the new study, Nima Nattagh of First American Real Estate Solutions Inc., thinks not. The virtually tax-free gains in equity many Americans have experienced in the past five years, he says, are extraordinarily high by historical norms, and ultimately "could become counterproductive."

Take places like Portland, Ore., where typical home values have soared by 124 percent since 1990, or Denver, where they're up by 119 percent in the same period.

"At some point," warns Nattagh, "the market gets so overheated that [housing] begins to interfere with the local economy -- the ability of even well-paid workers to find a place to live within their budgets."

In the San Francisco area, for instance, where the average appreciation rate of houses exceeded 1 percent per month in 1999, "You've got people commuting into the city from the far suburbs of Sacramento, and that can be a 2 1/2-hour commute."

Or take red-hot San Jose in Silicon Valley (up 12 percent in 1999), where some workers earning $40,000 and more cannot afford to rent or buy, and reportedly find shelter by sleeping on buses.

"That's eventually got to hurt economic growth in the area," says Nattagh. "You can't grow businesses if employees can't afford to rent or buy." Far better for the long term to own a home in an area that's more balanced, one that racks up steady appreciation over an extended period, and also retains a diverse stock of housing that workers can afford.

Examples include the Washington-Maryland-Virginia area, where home values increased at the rate of the national average during 1999 -- 7 percent -- but where strong job and income growth have tempered the impact of rising home prices.

Other major markets where appreciation was solid last year and at least moderately above-average over the decade: Chicago (home values up by 10 percent last year, 55 percent for the decade); Minneapolis (up 10 percent in 1999, 53 percent for the decade); Nassau-Suffolk on Long Island, N.Y. (up 11 percent last year, 24 percent for the decade); Naples, Fla. (6 percent gain in 1999, 26 percent for the decade); and Lexington, Ky. (up 7 percent in 1999, 37 percent for the decade.)

The new study, based on a "repeat-sale" methodology that tracks value changes in a national sample of more than 20 million homes, also found that values actually fell during the decade of the '90s in a number of markets that are currently experiencing strong appreciation rates.

Sixteen of the 121 markets in the study ended 1999 with lower home values, unadjusted for inflation, than they had in 1990. Most of them lost significantly during the rocky first half of the decade, and have been slowly recovering ever since.

Los Angeles is the most extreme example. Even though homes in the L.A. area increased in value last year by a stunning 14 percent, they still ended the decade worth an average 8 percent less than they would have sold for in 1990. In Hartford, Conn., houses gained 5 percent last year, but lost a net 15 percent during the decade. Homes in Sacramento, Calif., rose 9 percent in value last year, but lost 3 percent over the past 10 years.

Nattagh predicts that the high rates of appreciation of houses nationwide seen in 1999 are virtually certain to cool this year. With the Federal Reserve Board pledged to keep the overall rate of expansion in the national economy in check, says Nattagh, "home values inevitably will begin to moderate," especially in cities where they've been in double digits recently.

Is that necessarily bad news for you? Not if you've been a beneficiary of the appreciation boom of the last few years. Think about it: Your gains most likely have all been free of exposure to federal or state capital gains taxes. They can probably be converted to cash if you need to, through a cash-out refinancing or an equity line of credit. And best yet: What other high-yielding, wealth-producing investment can you name that you actually get to live in and enjoy?

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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