As the Federal Reserve moves to raise short-term interest rates once again, flags are being raised about the impact on housing prices. With housing being the largest household asset -- and one that has risen sharply over the last several years -- a downturn in housing prices akin to the fall in stock prices since 2000 would be devastating to families and the economy.
According to the latest Federal Reserve data, American households owned $16.6 trillion in real estate in the third quarter of 2004, up $2.2 trillion in the last year, an increase of 15.4 percent. By contrast, they owned just $9.4 trillion in corporate equities and mutual funds, which rose $923 billion over the same period, an increase of just 10.9 percent.
The Office of Federal Housing Enterprise Oversight reports that home prices rose 13 percent in the past year, almost 5 percent in just the last quarter. This is a very large increase by historical standards. However, some areas have seen much larger increases. Housing prices in Nevada are up 36 percent in the past year. Over the last 5 years, prices are up 107 percent in the District of Columbia, versus 48 percent nationally. Since 1980, homeowners in Massachusetts have seen a 566 percent rise. The national figure is 234 percent.
One worry is that mortgage lenders have been too easy about granting mortgage loans. However, service on mortgage debt was only 9.86 percent of disposable personal income in the third quarter, up from a recent low of 9.08 percent in the fourth quarter of 1998, but down from a high of 10.41 percent in the third quarter of 1991.
A key concern is that mortgage lenders now often lend to homebuyers with no money down. Until recently, they have usually demanded a 10 percent to 20 percent down payment before one could obtain a mortgage, in order to protect them from housing downturns. Furthermore, many homebuyers now have adjustable rate mortgages, which rise automatically when interest rates rise, rather than fixed rate mortgages that remain the same no matter what happens to interest rates.
A number of economists have warned lately that housing prices have increased far more than economic fundamentals would seem to justify, at least in some important markets. Economists at UCLA have concluded that California's housing market is in a bubble, and economist Stephen Roach of Morgan Stanley thinks much of the rest of the country is also experiencing a housing bubble.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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