House market cools, but collapse unlikely

June's 11.7 percent dip in existing-home sales reported yesterday is viewed as a leveling more than a bust.

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, a consulting firm.

"Logic tells us there has to be some relationship between home prices and income. In many markets, that relationship is out of whack," says Nicholas P. Retsinas, director of the Joint Center for Housing Studies of Harvard University. "We see a slowing in the rate of [price] growth but we don't see widespread price corrections occurring."

While most markets won't see prices actually drop, some may. "A couple of areas are at risk of downward corrections," says real estate consultant Burns, citing San Francisco, San Diego, and Denver. His ranking of the most overpriced markets is at the website

The outlook for real estate prices looms large in the economy. That is especially true now that some Americans are using housing investments as a haven from Wall Street turmoil. Some have been pulling money out of the market and buying homes with larger than usual down payments, says Celia Chen, senior economist with, a research firm. She notes that 25 percent down payments are becoming more common. The value of a person's home has a significant impact on how he or she spends – a much larger impact the stock market investments. The Federal Reserve Board estimates that every $1,000 gain realized in the sale of a house boosts spending by $150. A comparably sized stock market gain increases spending by $30 to $50.

Different housing experts cite different definitions for a price bubble that could pop, causing home prices to collapse. For some, it is prices rising faster than the average buyer's ability to pay or prices rising unreasonably in relation to the rent a house could bring. Others say a bubble only occurs when price speculation happens at the same time a housing market has an oversupply of homes for sale. But all agree that a national real estate bubble is much more difficult to create than a stock market bubble.

"We have looked at the bubble question and concluded it's most unlikely," at the national level Federal Reserve Board Chairman Alan Greenspan said last week. "Unlike stocks where you have a single market, low transaction costs and ability of people to pile on nationally and cumulatively, residential housing markets are all local. Transaction costs are quite large. To unload your asset, usually you have to move."

Long term, the outlook for the housing market remains strong, economists say. The new Harvard housing report says that "while the housing market may cool in the near term, favorable demographics should prevent a deep chill."

The combination of strong growth in the number of new households coupled with baby boomers' increasing appetite for vacation and retirement homes "argues for a strong (housing) sector" for the next five to seven years, Harvard's Mr. Retsinas says.

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