Housing boom spreads

Number of red-hot markets surges 72%, FDIC says


Inman News

The number of markets across the country that are experiencing housing booms climbed 72 percent in 2004, the Federal Deposit Insurance Corp. said, warning that booms may end in busts in some cases.

Average home prices rose by almost 11 percent in 2004, up from 7 percent in 2002 and 2003, according to statistics compiled by the Office of Federal Housing Enterprise Oversight. The number of boom markets in the U.S. now includes some 55 metropolitan areas, the FDIC said.

The FDIC defines boom markets as those that have had price increases of 30 percent or more in three years, after adjusting for inflation. About 15 percent of the 362 metro areas OFHEO tracks for home price trends met the boom criteria at the end of 2004, representing the highest proportion of boom markets in the OFHEO house price index's 30-year history.

The FDIC says the broadening of the U.S. housing boom may imply a growing role for national factors such as availability, price and terms of mortgage credit in explaining home price trends.

"To the extent that credit conditions are in fact driving home price trends, the implication would be that a reversal in mortgage market conditions could contribute to an end of the housing boom," the FDIC wrote in its report examining U.S. home prices.

Many economists worry that housing booms will end in a market crash. The FDIC says that not all housing booms will bust, and that history shows the majority of housing booms did not end in busts. The housing crashes FDIC identified in its February study were associated with local economic stress, such as recession and job loss.

However, in its February study examining the causes of housing booms, the FDIC noted reasons that history may be an imperfect guide to determining whether today's housing booms will bust or slowly fade. Today's market conditions, such as the emergence of the subprime market are pushing homeowners into uncharted territory.

"The expansion of subprime and high loan-to-value mortgages, along with growing use of home equity lines of credit, could change the dynamics of home prices in future cycles," the authors noted.

In addition, home buyers increasingly are taking advantage of higher-leverage mortgage products. In 2003, loans exceeding 80 percent of the home price accounted for almost one-third of all purchase mortgages. The practice of raising the total loan amount to a level very near the value of the home makes borrowers more likely to default if there is a housing market downturn.

"An increased incidence of default and foreclosure could, in turn, contribute to downward pressure on home prices as distressed properties are liquidated by lenders. However, little is known as yet about the effects these credit-market changes might have on the dynamics of boom-bust cycles," the FDIC stated in its February report.

Of the 55 boom markets FDIC pointed out in the latest study, 21 cities are in California, 18 are in the Northeast and New England, and 11 are in Florida. Of the 31 cities described as boom markets in both 2003 and 2004, all but three continued to see rising home prices in 2004, the FDIC noted. The three were Boston; Stockton, Calif.; and Worcester, Mass.