Growth in home value declines in 4th quarter

Nation's housing

March 10, 2002|By KENNETH HARNEY

AFTER MORE than a year of defying national economic trends, home-value appreciation finally has done the inevitable: slowed to a crawl.

A new federal study confirms that the growth rate in home values declined late last year, with the national appreciation rate nearly flat at a quarter of 1 percent during the final three months of 2001.

Make sure you've got that right: The government did not document net deflation in American home values, but rather a drop in the rate of appreciation in the months after the terrorist attacks. Home values continued to increase moderately in many major markets around the country, despite the aftershocks of Sept. 11.

A handful of markets did experience deflation in home values in the final quarter of 2001, most notably San Francisco (negative 1.83 percent) and San Jose, Calif. (negative 3.38 percent). Twelve of the 50 states registered small declines in property values during the same three months.

But overall, housing hung on despite recession and post-9/11 jitters -retaining market value in the face of an overall 2.5 percent drop in the national Consumer Price Index. Virtually every major sector of the economy saw prices decline during late 2001, but not home values.

Nationwide, according to data compiled by the agency that tracks values of existing homes, the year 2001 produced a net appreciation rate of 6.92 percent for the typical home.

In Baltimore, housing values were essentially flat in the fourth quarter, rising 0.08 percent, but rose 7.68 percent for the year.

The Office of Federal Housing Enterprise Oversight measures home value movements through a giant database that tracks more than 15 million refinancings and repeat-sales of homes whose mortgages were purchased by giant investors Fannie Mae and Freddie Mac. Its quarterly index is considered the most sensitive available on appreciation in values of existing homes.

What should you make of the latest federal report? Should you be troubled by the apparent end to the heady days of high appreciation rates? Should you fear the prospect of relatively flat home values in the months ahead? Or is there a different message buried in the numbers?

For starters, be aware of the historical perspective. Seven-percent appreciation is a high annual rate of gain for houses nationwide, even in expansive economic times. Last year's home appreciation far outperformed just about any other financial asset category - including stocks, bonds, gold, collectibles, you name it. National appreciation rates for much of the past decade were in the 3 percent to 4 percent annual range, as measured by the same agency.

During the recession years of 1990-91, home values in several regions of the country actually deflated. In Southern California during the early 1990s, some communities saw housing values decline by as much as 30 percent. So, on balance, 6.92 percent for 2001 represents a remarkable performance. It's enough to turn a $200,000 home you buy next weekend into a $300,000 home in just six years. Equally significant, that $100,000 equity gain over 72 months should be free of federal and state taxes.

Moderating home appreciation rates have other economic benefits. The housing market is like a giant food chain, with owners often moving up and buying higher-cost properties as their incomes and equities permit. But for the food chain to function, houses at the lower price range have to be affordable to newcomers.

Prices have to be in sync with current income levels, all the way up and down the chain. If they're not, the sequential buy, sell and move up process comes to a halt. Single-digit appreciation is much healthier for the home-buying system as a whole than bursts of double-digits - even if the latter produce huge capital gains riches for lucky sellers.

Moderate housing inflation also has benefits for local employment. When companies find they can't relocate employees to certain housing markets because of sky-high prices, they tend to shift resources - and jobs - to more affordable markets. That, in turn, cuts at the base supporting the high-cost local economy. The price bubble can burst.

Finally, if you're stretching to find silver linings in low appreciation rates, there is the matter of property taxes. Taxpayers around the country who had been enjoying annual increases of 10 percent to 15 percent in value on their homes have begun confronting the downside of real estate run-ups: sharply higher property assessments.

Housing price appreciation couldn't keep ballooning at the rates you saw in 2000 and 2001 - especially in the face of a recession. Now the balloon officially has lost some air. Look for national appreciation rates more in line with the historical average as 2002 unfolds - about 4 percent.

And don't worry, be happy.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at

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