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Generational Dynamics Web Log for 9-Sept-04
Housing prices are beginning to cool down after a year of record increases

Web Log - September, 2004

Housing prices are beginning to cool down after a year of record increases

The era of huge annual home price increases appear to be ending, as prices in some regions are beginning to cool.

Home prices grew at a record 9.36% during the last year, the highest four-quarter increase since the 1970s. The report (PDF) from the Office of Federal Housing Enterprise Oversight (OFHEO).

House price index, 1990-2004 <font size=-2>(Source: OFHEO)</font>

House price index, 1990-2004 (Source: OFHEO)

The report details housing price increases in regions throughout the nation. It shows that the highest increase, 23%, in Nevada, with Hawaii and California close behind; and the lowest increase (2.58%) is Utah, with Texas and Indiana close behind.

The huge spurt in the last year has been caused by exceptionally low interest prices. After the Nasdaq crash of 2000, falling stock prices might have caused numerous bankruptcies and foreclosures. The Fed reduced interest rates to near-zero, allowing people and businesses that might have gone bankrupt continue by means of low-interest credit.

Because of the low interest rates, mortgage payments became substantially cheaper, so that people could afford more expensive houses, thus increasing home prices.

Now that the Fed is increasing interest rates, housing prices are beginning to cool. However, according to a new estimate, prices of homes in California, Nevada and Florida have begun to fall abruptly in the last couple of months. One expert indicates that a one percent change in interest rates, which is approximately the amount that the Fed has promised for the next few months, will result in a 20% fall in home prices. Prices in surburban Boston are falling as well, according to The Wall Street Journal. And existing-home sales declined 2.9% in July, according to a report from the National Association of Realtors.

America is not the only country with overpriced real estate. According to investment firm Morgan Stanley, residential properties in countries around the world, including America, Australia, the United Kingdom, China, South Korea, Spain, the Netherlands, and South Africa, are overpriced by 50% or more.

Some of those prices are beginning to fall as well; Australian housing prices have begun falling substantially, for example.

The moral of this story is that if you own, or you're thinking of buying, residential property, then you should not assume that prices will continue to go up any longer. (9-Sept-04) Permanent Link
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Generational Dynamics Web Log for 9-Sept-04 Housing prices are beginning to cool down after a year of record increases

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Generational Dynamics Web Log for 9-Sept-04
Housing prices are beginning to cool down after a year of record increases