NCPA - National Center for Policy Analysis

THE RISE IN HOUSING PRICES

December 15, 2004

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, says Bruce Bartlett.

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.

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, says Bartlett.

Source: Bruce Bartlett, "The Rise in Housing Prices," National Center for Policy Analysis, December 15, 2004.

 

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