A MAY UPDATE TO A FEBRUARY 2005 Federal Deposit Insurance Corp. (FDIC) report found that more housing markets are experiencing booms today than ever before, spurred on by both local-market conditions and nationwide factors, including the availability, price, and types of mortgages.
Housing Starts Chart The FDIC issued the report, “U.S. Home Prices: Does Bust Always Follow Boom?” in February, based on home-price data from the Office of Federal Housing Enterprise Oversight (OFHEO) through third quarter 2004. The authors, Cynthia Angell and Norman Williams, defined a booming market as one in which inflation-adjusted home prices had grown 30 percent or more within a three-year period. Based on that definition, 63 cities had experienced booms within the past 30 years, and 33 cities were booming at the end of 2003.
Mortgage Rates in detail But when the authors returned for a follow-up look, based on the full 2004 OFHEO home-price data, they found an additional 22 boom cities, bringing the total to 55. “This represents the highest proportion of boom markets nationwide in the 30 years of historical price data published by OFHEO,” they wrote. By comparison, as recently as 2000, just nine markets were booming.
Consumer Poll “It's one thing to explain 33 markets in terms of local factors, but it's different in 55. It leads one to look for national factors,” says Richard A. Brown, the FDIC's chief economist.
More on regional starts The chief national factors, according to the FDIC: the “availability, price, and terms of mortgage credit.” Brown points out the tremendous growth in adjustable-rate mortgages, which he says is a consequence of the high housing prices in the booming markets and may be encouraging even higher prices.
Median Sales Prices These changing dynamics of the housing industry make it difficult to predict what will happen to the boom markets. According to the FDIC report, just nine housing busts—defined as a 15 percent drop in nominal home prices over a five-year span—have happened on the heels of a boom. Between 1978 and 1998, 80 percent of the booms ended with a period of price stagnation, the authors say.
New Homes Sales The FDIC plans to investigate further the effects of the changing mortgage industry on prices, but the increase in overseas investment in the United States, one factor helping to keep U.S. interest rates low, complicates the forecast. “We definitely have concerns about what happens on the other side of this boom,” Brown says. “What happens overseas affects, to a greater or lesser extent, what happens in your own backyard.”
Lumber Prices SOURCE: U.S. CENSUS BUREAU
SOURCE: FREDDIE MAC
SOURCE: UNIVERSITY OF MICHIGAN SURVEYS OF CONSUMERS