Study Shows No Signs of Home Appreciation Weakening

WASHINGTON--With signs of a slowdown now 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 that the housing appreciation boom is weakening. In fact, the latest quarterly data from the Office of Federal Housing Enterprise Oversight (OFHEO), released Thursday, reveal that last year was even hotter than reported earlier--an 8.1% 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 2000. The 1.8% fourth-quarter increase nationwide translates into a 7.2% annualized rate, slightly below the actual rate for the entire year.

Handsome Gains-- for Some States
Houses in a handful of states and the District of Columbia produced double-digit value gains for 2000. Washington, D.C., homes appreciated by an average 14.8% last year. Massachusetts homes jumped 14.5%, California and Rhode Island by 13.8%, Colorado by 12.8%, Minnesota by 11.1%, and New York by 10.6%.

A few major metropolitan markets--mainly in California--registered annual gains above 20%. San Francisco homes--already among the priciest in the country--rose by another 20.7% in value last year. And despite the dot-com meltdown and tough times in high-tech, San Jose homes rose by nearly 27% in value during 2000.

San Diego values rose 16% for the year, Santa Barbara, 11.8%, and homes in the Los Angeles-Long Beach area, 8.5%.

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

But is the hyperinflation the new study documents healthy? Could a national appreciation rate over 8% constitute a bubble that's bound to burst in rougher economic times? The economist who administers and analyzes the federal housing price index, Shelly Dreiman, says there's a noteworthy feature present in the recent appreciation run-ups.

Unlike 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, in other words, can translate into higher housing prices without necessarily creating an artificial bubble.

"Income growth has been commensurate with home-price growth," said Dreiman. "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 jumped by double-digit percentages, but so did the rate of inflation. You sometimes needed a 12% gain in home equity just to stay even.

Inflation and Home Values
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% for half a decade. Housing values, by contrast, have been inflating by 4% to 8%.

But can 8.1% appreciation in the midst of a slowly weakening economy be sustained? Dreiman's agency has 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 eventually begins to erode the local economic base. 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 very energy from the local economy that was fueling the hyperinflation.

Appreciation of 20% a year generally "is not sustainable" for very long, says Dreiman. 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% in value. The average home nationwide during the same period gained 151%. Massachusetts' diversified, cutting-edge economic resources have allowed it to defy the odds, pumping out steady, higher-than-average housing appreciation while other states experienced booms followed by busts.

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.
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Distributed by the Washington Post Writers Group.