Home Price Gains Likely to Slow Down

Industry economists are backing up what recent statistics have indicated - that home price growth has slowed down.

Fueled by low interest rates and a tight market, home prices have risen significantly faster than inflation in recent years, but now economists at Fannie Mae, Freddie Mac and the Mortgage Bankers Association of America believe that the pace of home price gains is slowing.

However, none expect to see prices fall on a national basis.

Fannie Mae expects to see home price gains nationally in the range of 4% to 5% this year, a figure that would be in line with family income growth.

Speaking at the MBA National Mortgage Servicing Conference, Freddie Mac principal economist Amy Cutts said she expects the pace of home price gains "are going to coast down" this year, perhaps to about 4.8%, the long-term average rate of annual home price growth. She said the rate may even dip below that long-term average.

While Ms. Cutts sees little reason to worry about a national home price "bubble," she said some local markets could see price declines. The risk of price declines is greatest in markets characterized by "inelastic supply." In places such as San Francisco, where a lack of space and barriers to home construction prevented builders from responding to the frenzied run-up in prices during the late 1990s, prices could fall as demand slackens, she said.

But Ms. Cutts said there is little risk of a widespread decline. The last time prices declined across the board was during the Great Depression, when prices fell 25% nationally.

Recently, the Office of Federal Housing Enterprise Oversight found that home prices increased 6.9% in 2002 nationally. However, OFHEO said the pace of rising home values slowed sharply in the second half of the year.

In the fourth quarter of last year, the annualized rate of home price appreciation slowed to 3.3%, OFHEO said.

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