House market cools, but collapse unlikely

It is hard to watch stock market investments melt.

But it could be worse. Most Americans did not have the biggest chunk of their assets parked on Wall Street – they live in their big investment.

Typically, homeowners have at least 50 percent of their net worth tied up in home equity.

Homes play a key role not only in personal finances but in the nation's economic health. The housing sector accounts for one fifth of the country's total economic output. So individuals and economists are both looking with considerable interest at housing's health – especially in the wake of the stock market's slump.

Real estate prices have been on a seven-year climb, although the overall gain has been significantly smaller than that posted by stocks in the 1990's. Still, the nation's 48 largest metropolitan areas all registered price increases in 2001 and 28 markets reported all-time highs, according to a new study by the Joint Center for Housing Studies of Harvard University.

Prices in eight of the largest metropolitan areas have risen an inflation-adjusted 30 percent or more since 1997, Harvard says. In San Francisco, home prices soared over 55 percent in that time period.

Despite sharp gains, experts say that while some local housing markets are overheated, no national real-estate price break is imminent. "Nationally, we are not in a bubble," says John Burns, a real estate consultant from Irvine, Calif.

That's the good news. The bad news is that many experts think the rapid real estate price run-up is coming to an end.

One sign of that came Thursday. The National Association of Realtors reported that sales of existing homes fell 11.7 percent in June, the biggest sales drop in seven years.

The pace of sales was still a respectable 5.07 million units. Existing home sales represent 80 percent of the real estate market, new homes only 20 percent.

In June, existing home prices went up 7.4 percent. "We are not going to stay there nationally," says David Lereah, chief economist for the National Association of Realtors. "Price appreciation will slow. We can't sustain this pace." He expects home prices to rise in the 4-5 percent range next year.

"Most markets are local. But nevertheless, the average pace of house price gains is going to slow," says Jan Hatzius, a senior economist at Goldman, Sachs Inc.

There are a variety of reasons economists expect home price appreciation to slow in the months ahead. One important factor is that home prices have been rising faster than the growth in homeowner income. In the last year, home prices grew at an 8 percent annualized pace, compared with less than 2 percent growth in per capita income, according Economy.com, a consulting firm.

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