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Real estate bubble is losing air in some areas


IF YOU like a lot of froth with your real estate, you will enjoy the federal government's latest numbers on appreciation in home values.

If you've been expecting the boom to fizzle any day and are convinced that double-digit appreciation rates can't continue, you need to push back your bubble-bust timeline.

That's the upshot of the latest quarterly data on 265 major real estate markets compiled by the Office of Federal Housing Enterprise Oversight, which tracks home pricing changes nationwide.

From the first quarter of 2004 through this year's first quarter, the average home in the United States appreciated by a near-record 12.5 percent. During the 12-month survey period, some local markets were as hot as or hotter than they had been in decades.

In California, noted for its high-cost real estate, the average increase was 25.4 percent. That is an increase of close to 2 percent a month, often on homes that started out at more than $1 million.

Nevada houses, though nowhere near as expensive as California's, gained an extraordinary 31.2 percent on average during the 12 months, the survey found.

In three other states - Maryland (21 percent), Florida (21.4 percent) and Hawaii (24.4 percent) - home values gained more than 20 percent on average. The District of Columbia, treated for statistical purposes as a state, had an average gain of 22.2 percent.

A near-record 43 metropolitan areas, including Baltimore, had average appreciation rates of 20 percent or more. Three of them - Las Vegas and Reno, Nev., and Palm Bay-Melbourne, Fla. - topped 30 percent.

In none of the 265 metropolitan areas in the federal study did values decline, and in no state was the rate of gain lower than the national Consumer Price Index inflation rate of 3.1 percent for the year that ended March 30.

But not all signals were positive in the latest numbers. There are distinct hints that some of the zestiest markets might have started slowing down. Of the 20 metropolitan areas with the biggest gains, none had an annualized quarterly rate that equaled or exceeded its appreciation rate for the year.

California's price inflation rate during the first quarter of 2005 was 3.8 percent. Annualized - that is, multiplied by four - that comes to a rate of 15.2 percent. That is still frothy, but nowhere as wild as the state's 25.4 percent rate from the first quarter of 2004 through the first quarter of 2005.

Maryland also had an equally frothy 15.2 percent annualized rate for the first quarter, but that was below the 21 percent for the 12-month period.

Rhode Island had a 1.91 percent average gain in the first quarter of 2005. Annualized that comes to 7.64 percent. Contrast that with the state's 17.1 percent average gain for the 12 months covered by the government study.

Similar shifts can be seen in dozens of other local areas, and a few appear to be heading into negative territory. Beaumont-Port Arthur in Texas had a 5.2 percent average appreciation rate over the 12-month period. Yet the first quarter annualized rate was a negative 8.6 percent. Syracuse, N.Y. posted a 12-month rate of 6.8 percent, but its annualized first quarter rate was a negative 3.5 percent.

Patrick Lawler, chief economist for the Office of Federal Housing Enterprise Oversight, foresees a "potential for declines in some areas" in the latest survey data, especially where there have been exceptional increases.

The chief economist for the National Association of Home Builders, David Seiders, agrees, as do most mortgage and real estate economists, whose refrain was summed up by Seiders: "This is not sustainable, not at the levels we've been seeing."

Seiders and others are quick to point out that in wide swaths of the country - the Midwest and South-Central states in particular - real estate fever is not an issue. Housing values in dozens of local markets in those regions continue to appreciate steadily at 5 percent to 10 percent, much as they have for decades. Losing money by buying a house now at what could be the top of the cycle is not a concern.

Buyers in the super-zesty markets along the Atlantic and Pacific coasts, however, would be foolish not to ask the key questions: Where are we in the cycle here? How many more quarterly reports with 20 percent gains can we really expect? Can local employment and income growth support price rises that squeeze larger numbers of buyers out of the game?

High double-digit gains historically never have continued in any market for an extended period.

Ken Harney's e-mail address is

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