Decline In Home Price Growth To Slow Economic Recovery
DOW JONES NEWSWIRES
(This article was originally published Friday)
By Joy C. Shaw
Of DOW JONES NEWSWIRES
NEW YORK -- A dramatic slowdown in the growth of U.S. home values during the fourth quarter confirms many economists' belief that the housing market, regarded as one of the few bright spots in the economy over the past year, will play a less significant role in the year ahead, as the economy goes into recovery mode.
Two sets of home price data released Friday, one from Freddie Mac (FRE) and the other from the Office of Federal Housing Enterprise Oversight, showed a sharp decline in home price appreciation during the fourth quarter.
OFHEO said U.S. home prices increased by merely 1.0% at an annualized rate in the fourth quarter, compared with a 7.58% annualized growth rate in the third quarter. The fourth quarter number is the slowest quarterly growth rate since 1996, OFHEO said.
And Freddie Mac's conventional mortgage home price index showed the national average of home values grew at an annualized rate of 1.3% in the fourth quarter, down sharply from the revised 7.7% annual rate registered in the third quarter.
The slower rate stands in stark contrast to the long-run trend. According to Freddie Mac, the annual home price appreciation between the fourth quarter of 2000 and the fourth quarter of 2001 was 7.1%, and house values nationally have increased 37.1% since the fourth quarter of 1996.
Both organizations base their statistics on conventional mortgages sold to Fannie Mae (FNM) and Freddie Mac but each uses slightly different calculation methods.
The slowdown, although dramatic, did not surprise economists, who said the recession and the shock of the Sep. 11 terrorist attacks were to blame.
But a slower growth in home prices does mean U.S. households will see less accumulation in home equity than in the past few years.
And that will translate into less mortgage refinancing activity, especially the so-called cash-out refinances, where homeowners extract equity on houses by taking out mortgages larger than the original ones, economists say.
Freddie Mac's chief economist, Frank Nothaft, said slower home price appreciation, coupled with modestly higher mortgage rates, may cut mortgage debt growth to 7% in 2002 from 10% in 2001. The share of mortgage refinances, currently account for about half of the mortgage activity, may drop to 25% by the end of 2002.
"Home prices have reached a level where trading up is less appealing especially if people are more concerned about the unemployment situation," said Kenneth Hackel, fixed-income strategist at Merrill Lynch.
And, if it became severe enough, the decline in cash-out refinances could sap the economic recovery this year, because homeowners will not be able to access as much home equity and inject it into the economy as they used to in the past few years, said Scott Anderson, senior economist at Wells Fargo & Co. (WFC).
"That's one of the reasons why most economists have been saying that this recovery won't be as robust as the ones in the past," he said.
Small Appreciation In 2002
Although dramatic, the drop in home price appreciation in the fourth quarter is also more likely a temporary blip than the beginning of a trend, said Anderson. "We don't expect the decline to continue over a long period of time."
Indeed, recent economic data and anecdotal evidence suggest that home prices may have recovered somewhat in the first two months of the year, economists say.
Still, while U.S. home prices may not depreciate, a turnabout that would have devastating effect on consumer psychology, the growth rate in 2002 won't match that seen in the past few years, most say.
Freddie Mac's Nothaft put his projection of home price growth for the whole year of 2002 at 3%, "with stronger gains toward the end of the year than at the beginning of the year."
-By Joy C. Shaw, Dow Jones Newswires; 201-938-2137; joy.shaw@dowjones.com
Updated March 4, 2002 8:01 a.m. EST |
