The US Housing Enigma

This may or may not be a bubble, but the question still remains, what is going to happen when this comes to an end? US house prices rose by 6.89 per cent in 2002, way above the CPI and way above earnings increases. Long term this is not sustainable, in fact there is some indication in laster quarter numbers that the upward push may already be waneing. Housing can be thought to serve as a useful investment window for the young (first home), and the not so young (trading up, or second home investment), and with values rising nicely those who want to consume rather than save can refinance. But look down the road a little at the changing age structure, and ask yourself what is going to happen to prices when all the baby boomers want to cash in savings and sell the second homes, or trade down to something smaller to pay all those medical bills. Where are all the buyers coming from? And what will happen to consumption if there is no refi upside?

U.S. home prices rose 6.89 percent during the fourth quarter of 2002 from the same period in 2001, as record low mortgage rates fueled home sales to all-time highs last year, the Office of Federal Housing Enterprise Oversight (OFHEO) said on Monday. The U.S. housing market has been a pillar of strength for the sluggish U.S. economy. Strong demand for homes has buttressed construction jobs and sales of household goods. Consumers, who account for two-thirds of the U.S. economy, have been tapping into higher home values through "cash-out" refinancings of their existing mortgages to get cash for spending or paring their debt.

Average fourth quarter U.S. home prices appreciated a tiny 0.83 percent from the third quarter, the smallest quarter-to-quarter increase since the second quarter of 1998, according to the U.S. regulatory agency that oversees the financial soundness of mortgage finance giants Fannie Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news). Four states and 22 metropolitan areas experienced declines in home prices from the third quarter to the last three months of 2002. In the third quarter, seven states and 33 localities posted home price decreases, OFHEO said.
Source: Yahoo News
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