03.08.2001 :: Loans
No Sign Housing Market is Slowing
by Tai Boutell

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 yet 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 the year 2000 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.

Houses in a handful of states produced double-digit value gains for the year 2000. MA homes jumped 14.5%, CA 13.8%, CO by 12.8%, MI by 11.1, and NY 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.

The data are particularly significant because they measure what no other government index attempts to: changes in the actual 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 sort of hyperinflation the new study documents healthy? Could a national appreciation rate over 8% constitute an evanescent, tulip-bulb bubble that's bound to burst in rougher economic times? The economist who administers and analyzes the federal housing price index, Shelley 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," Dreiman said. "In the 70s 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 70s 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.

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 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 eventually begins to erode the local economic base itself.

If corporate employees can't handle increasing housing prices in a local market, the companies that employ them may decide to move 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.

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

Tai Boutell is a longtime resident of Santa Cruz County. He earned his Bachelor's Degree in Political Science from California State University, Chico. After two years of law school he moved to the Lake Tahoe area to manage a ski resort in the winters and a whitewater rafting company in the summers. With extensive experience in customer service and marketing, he joined the team at Santa Cruz Mortgage as a Mortgage Consultant. He is now at Santa Cruz Home Finance where he specializes in mortgage lending and financial planning for all types of home buyers. With a vision to build his business based on 100% client referrals, he continually strives to provide a level of service that will exceed his clients' expectation. Tai can be reached by phone at (831)425-1250 or by email Tai@santacruzhomefinance.com

This is a reprint of the column "Your Money", in the Business section of the San Francisco Chronicle.