Ken Harney Easing Home Price Gains Could Be a Healthy Thing

You may not like this news, but if you care about home real estate values you need to know: The high-flying American home inflation balloon finally is losing some of its hot air.

That is a statistical fact, even in areas where annual appreciation gains have been in the double digits and where houses still go to the highest bidder in multiple-contract contests.

The latest quarterly price inflation study compiled by the Office of Federal Housing Enterprise Oversight, covering more than 220 metropolitan markets, documents significant slowdowns across the country. Though the average national appreciation rate for homes is still an impressive 7.7 percent, the first quarter 2004 data reveal a cooling trend in even the hottest places.

Of the 53 metropolitan housing markets where the last full year’s price inflation was in double digits, only Las Vegas registered an annualized first-quarter rate equal to or above last year’s rate. To illustrate: The Washington, D.C., metropolitan market sizzled last year with an average appreciation of 12.65 percent. Yet the annualized first-quarter rate for 2004 was just about half that, 6.72 percent.

The same was true for high-octane New York state, where average home appreciation during the last year was 11.7 percent, but the annualized gain during the first quarter was just 2.4 percent. Florida’s 2003-04 appreciation rate of nearly 12 percent cooled off to an annualized 8 percent during the first quarter of 2004. California dropped from 14 percent to 8 percent Nationwide, annualized first-quarter price appreciation reflected a similar softening – 3.84 percent versus the 7.7 percent rate from the year-earlier period. The quarterly increase of just 0.96 percent was the lowest since 1998. Equally noteworthy is the fact that in 39 metropolitan real estate markets, home values actually declined slightly on a quarterly basis. During the last quarter of 2003 there were only three such depreciating markets, and no states.

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In the first quarter of this year, by contrast, six states went slightly negative (Vermont, Alaska, North Dakota, South Dakota, Iowa and Nebraska).

Looking at the country’s housing appreciation patterns from a satellite using thermal imaging, you’d see a distinctive “parentheses” pattern, with the hotter markets in red concentrated along the Atlantic and Pacific Coasts, and the slower-appreciating blue and green markets generally in the middle and southern sections of the country. Other than Nevada (15 percent average gains in the last 12 months), all the high-froth housing appreciation markets are coastal: Hawaii (15.2 percent), Rhode Island (14.8 percent), California (13.9 percent), Maryland (12.9 percent), Florida (11.7 percent), New Jersey (10.9 percent), Delaware (10.4 percent), New York (10.2 percent) and Virginia (10.1 percent). The District of Columbia, treated by the office as a state for statistical purposes, came in with the fourth-highest annual rate of appreciation, at 14.3 percent. The slowest-gaining states in the last 12 months were Utah (1.95 percent), Texas (2.34 percent), Indiana and Colorado (2.8 percent) and Alabama (3.2 percent).

The good news here is that in home real estate, moderate and steady appreciation is good. Wild and crazy appreciation is bad. High double-digit appreciation rates tend to consume the markets in which they occur. Houses become unaffordable, people and businesses start to move elsewhere and the price gains fizzle out. Remember how out of control home prices got in the San Francisco Bay and Silicon Valley markets at the height of the dot-com frenzy? It’s instructive to take a look at where San Jose and San Francisco have been since then. Back in 1999 and 2000, annual home appreciation rates were rocking along in both areas in the high teens and even more than 20 percent. Last year, by contrast, the market value of the average home in San Jose rose by just 2.3 percent. In San Francisco, the rate was 5.2 percent. Both markets have undergone corrections, but there has been no bust. San Jose’s annualized first-quarter appreciation number even shows signs of an incipient revival – a 4.2 percent rate, nearly double last year’s.

The same sort of pattern – a moderate slowdown in the rate of price appreciation – is now likely in many other high-gain markets. That trend could be enhanced by expected increases in mortgage interest rates later this summer and fall, as the Federal Reserve throttles back the surging American economy. As that process unfolds, keep this in mind: Slower real estate appreciation means more people will be able to afford to buy your house. And as long as home appreciation rates stay at double or triple the underlying rate of inflation in the overall economy, you’re doing just fine.

Ken Harney is a real estate columnist for the Washington Post.