ICS Magazine

Regional Home Price Drop Possible

August 31, 2004
WASHINGTON (Reuters) - U.S. housing industry economists on Monday cautioned that rapid house price gains in some areas of the country may not be sustainable.

"There is an increasing risk of price declines in some of those areas, especially those in which job growth has been the most anemic," said David Berson, chief economist at mortgage finance provider Fannie Mae. Berson spoke on a conference call organized by the Homeownership Alliance about the outlook for the housing industry.

Economists forecast a strong second half of 2004 for the industry -- in spite of rising mortgage interest rates -- as the U.S. economy gains strength.

"Corporate profits are up 40 percent from two years ago, so companies are spending and jobs are being created," said David Lereah, chief economist for the National Association of Realtors. "In the housing markets this is largely neutralizing the effects of modestly higher interest rates."

Some regions of the country, such as Las Vegas, Anaheim, California; Baltimore and Washington, D.C., have seen sharp home price gains, the economists said. At the same time, other areas, including South Bend, Indiana; Syracuse, New York; Little Rock, New Orleans and Dallas, have had 2 percent or less appreciation for the year, they said.

The economists said strong demand and tight inventories, not speculation or overbuilding, were causing price rises. The economy appears likely to create more jobs and raise incomes, supporting demand for homes, they added.

But where job growth is weak, price increases are vulnerable, the economists said.

"We do have some concerns about some of the metro areas that have very high price gains and haven't seen job gains or continue to see job losses. But that's a very small number," Berson said.

Their comments echoed concerns raised by Federal Reserve Chairman Alan Greenspan in a written response to a question from New Hampshire Republican Sen. John Sununu made public last week.

Greenspan said the faster pace of house price gains compared with income growth, "raises the possibility that real-estate prices, at least in some markets, could be out of alignment with the fundamentals."

The economists said housing activity is likely to moderate with higher interest rates.

Home building is likely to recede from a strong second- quarter pace, but the overall year should set record highs for single family starts and new home sales, said David Seiders, chief economist of the National Association of Homebuilders.