Rise in value of homes remains strong so far

Nation's Housing

March 04, 2001|By KENNETH HARNEY

WITH SIGNS of a slowdown evident in key segments of the national economy, should you be waiting for the next shoe to drop - a decline in the rate of appreciation in the value of your home?

Maybe. But the federal agency that tracks home-value changes says in a new study that there are virtually no statistical signs yet that the housing appreciation boom is weakening. In fact, the latest quarterly data from the Office of Federal Housing Enterprise Oversight, released Thursday, reveal that the year 2000 was even hotter than reported earlier - an 8.1 percent average gain in the resale value of existing homes across the country.

The only hint of possible cooling ahead came in the agency's appreciation data for the final three months of last year. The 1.8 percent fourth-quarter increase nationwide translates into a 7.2 percent annualized rate, slightly below the actual rate for the year.

Houses in a handful of states and the District of Columbia produced double-digit value gains for the year 2000. In Washington, homes appreciated by an average 14.8 percent last year. Massachusetts homes rose 14.5 percent in value, California and Rhode Island by 13.8 percent, Colorado by 12.8 percent, Minnesota by 11.1 percent and New York by 10.6 percent. Maryland homes increased by 6.6 percent.

A few major metropolitan markets - mainly in California - registered annual gains of more than 20 percent. San Francisco homes - among the priciest in the country - rose by another 20.7 percent in value last year. And despite the dot-com meltdown and tough times in high-tech, San Jose home values rose by nearly 27 percent last year.

As for the Baltimore market, homes appreciated 6.3 percent for the year and 1.2 percent for the fourth quarter.

The new federal housing data are particularly significant because they measure what no other government index attempts to: changes in the actual market values of homes. The database tracks a huge, 12 million-home statistical sample of individual properties as they are refinanced or resold.

But is the sort of hyperinflation the new study documents healthy? Could a national appreciation rate of more than 8 percent constitute an evanescent, tulip-bulb bubble that's bound to burst in rougher economic times?

Shelly Dreiman, the economist who administers and analyzes the federal housing price index, said the recent appreciation increases have a noteworthy feature.

In contrast with earlier periods of short-term mini-bursts of housing inflation - as occurred in the late 1970s - current home values are in sync with household income growth. Higher real incomes can translate into higher housing prices without necessarily creating an artificial bubble.

"Income growth has been commensurate with home price growth," Dreiman said. "In the 1970s, people bought houses as a hedge against inflation"- not because their household incomes fully supported the prices they were paying.

Home prices in the late 1970s rose by double-digit percentages, but so did the rate of inflation. You sometimes needed a 12 percent gain in home equity just to stay even. Today, inflation, as measured by Consumer Price Index, is not a motivating factor in home buying. Inflation in the economy overall has been below 3 percent for a half-decade. Housing values, by contrast, have been inflating by 4 percent to 8 percent.

But can 8.1 percent appreciation in the midst of a slowly weakening economy be sustained? Dreiman's agency maintains no crystal balls, but she agrees that any sustained economic downturns - higher unemployment rates, stock market losses, higher interest rates - could chip away at home-value inflation.

Apart from the national economy, hyperinflation in housing in local markets begins to erode the local economic base itself. If corporate employees can't handle escalating housing prices in a local market, the companies that employ them may decide to move their facilities to more affordable locations. That, in turn, saps the energy from the local economy that was fueling the hyperinflation.

Appreciation of 20 percent a year generally "is not sustainable" for very long, Dreiman said. But housing inflation at half that rate may well be sustainable in exceptional circumstances. Take the case of Massachusetts.

Since 1980, the typical Massachusetts house has gained an astounding 355 percent in value. The average home nationwide during the same period gained 151 percent. Massachusetts' diversified, cutting-edge economic resources have allowed it to defy the odds.

The bottom line here for owners and buyers? So far, so good. A house continues to be one of your highest-returning and least-volatile forms of capital investment. If the long-expected soft landing in the national economy materializes, look for modest declines in your rate of appreciation. But no hard jolts.

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

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