Home prices rose at fastest pace in 25 years, study says


THE market value of the average house nationwide jumped by nearly 13 percent from the third quarter of 2003 to the same period this year. That rate surpasses all annual increases during the past 25 years, according to a new federal study.

But a 13 percent gain on a national basis pales in comparison to the appreciation rates racked up in dozens of local metropolitan areas, primarily in the West and along the East Coast.

New data compiled by the Office of Federal Housing Enterprise Oversight, the agency that tracks home price movements across the country, found that the average house in three-dozen major metropolitan areas gained more than 20 percent in value, including Baltimore-Towson, which rose 22.6 percent.

A handful of markets experienced hyperinflationary rates that literally soared off the federal government's charts: Las Vegas-area homes gained a stunning 41.74 percent in value during the 12-month study period alone - the highest annual rate of housing inflation ever measured for a large metropolitan area in the United States.

Homes in Los Angeles and San Diego also were hot, gaining more than 30 percent. On the East Coast, houses in the Washington metropolitan area gained 24 percent in the 12-month period, while Miami and Fort Lauderdale homes rose by 23.5 percent on average.

Even in Midwestern markets that traditionally show more moderate annual price gains, houses jumped by double digits: Chicago-area homes were up by 11.3 percent, and Madison, Wis., homes gained 11.2 percent.

What is going on here? Didn't most economists forecast 2004 to be a year of steadily declining price appreciation combined with steadily rising mortgage interest rates? Wasn't home price appreciation supposed to slip back into the 5 percent to 6 percent range, more in line with 50-year averages in the 4 percent range or below?

Absolutely. But several key factors intervened to change the equation. Though short-term interest rates have been on the rise all year, long-term rates in the mortgage market have remained below 6 percent, making home purchases more affordable. A second factor has been exceptional economic strength and employment growth in a number of major markets.

Las Vegas has seen large influxes of new residents and jobs during the past several years, pushing home prices up sharply. Metropolitan Washington, as well as the Baltimore area, also experienced significant employment growth, thanks in part to higher federal spending.

Markets with above-average unemployment rates and sluggish economic growth, by contrast, showed anemic home price gains in the latest federal study. Houses in Austin, Texas, for example, gained just 2.08 percent, while homes in Anderson, S.C., rose by just 1.27 percent.

Another, more subtle factor may have affected the latest statistics as well: the end of the refinancing boom. OFHEO's chief economist, Patrick Lawler, says appraisals conducted for many refinancings in recent years may have understated actual property values. With the refinancing boom out of the way, most of the transactions monitored in the latest OFHEO study are home purchases, where the appraisal and closing prices are more likely to reflect actual market values.

Whatever the cause, home equity gains are making owners richer - at least on paper - this year in most parts of the country. But can hyperinflation continue indefinitely? No, and if it did, it would eventually wreck dozens of local economies by pushing homes further out of the reach of most households, even at low interest rates.

Mortgage market economists such as Freddie Mac's Frank Nothaft now predict a deceleration in home value growth in the months ahead, especially in areas that have been red-hot gainers in the latest federal study.

That's probably a safe assumption for anyone contemplating buying a new or resale home in 2005: Bank on more moderate appreciation and higher mortgage rates. Hyperinflation is only fun in the short run.

The federal government's House Price Index data can be viewed at www.ofheo.gov.

Ken Harney's e-mail address is KenHarney@earthlink.net.

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