Rising interest rates are supposed to be an economic sedative, but the hyperactive real estate market has retained its vigor even as the prime lending rate has climbed to a nearly four- year high.
One of the biggest reasons for real estate’s unusual behavior is that home mortgages are less expensive than they were 14 months ago when the Federal Reserve Board began to push up the short-term cost to borrow money.
That inflation-fighting effort has raised the prime rate from 4 percent in June 2004 to 6.5 percent today, making it more costly to buy cars, appliances and almost anything else on credit.
Meanwhile, home mortgages have remained a relative bargain. The average rate for a 30-year fixed-rate mortgage stood at 6.05 percent through Thursday, down from 6.41 percent during the first week of June 2004, according to HSH Associates, an industry research firm.
Those low financing costs mean homebuyers can qualify for larger loans – a major factor why real estate prices have continued their steady ascent in neighborhoods scattered across the country.
The trend troubles Federal Reserve Chairman Alan Greenspan and many other economists, who worry that cheap mortgage money is contributing to a real estate pricing bubble that could trigger a traumatic recession.
“It’s very hard to understand the psychology of any market,” said UCLA economics professor Edward Leamer. “But it’s fundamentally clear that the housing market is in a fragile and dangerous situation.”
The risks of a real estate meltdown aren’t the same across the country because mortgages aren’t the sole factor influencing home prices.
Other key considerations include an area’s desirability, the supply of available housing and the strength of the local job market.
The housing markets most susceptible to a sharp downturn in prices are in California, Massachusetts and New York, according to PMI Group Inc., a mortgage insurance provider based in Walnut Creek, Calif.
Based on a recently completed analysis, PMI predicted six major metropolitan areas face at least a 50 percent chance of enduring a drop in home prices within the next two years: Boston-Quincy, Mass.; Nassau-Suffolk, N.Y.; San Diego County, Calif.; Santa Clara County, Calif.; Orange County, Calif.; and a two-county area east of San Francisco.
In the nation’s 50 biggest markets, the average risk of a price decline during the next two years stands at 21 percent, PMI said.
After years of rapid price appreciation, things appear to be slowing down in some markets such as San Diego County, where a mid-priced home sold for $493,000 in June, more than doubling from $232,000 five years ago, according to DataQuick Information Systems.
But San Diego home prices have gained just 6 percent during the past year, tapering off from the double-digit growth that had prevailed since early 2000, said DataQuick analyst John Karevoll.
“We are monitoring San Diego very carefully because that appears to be where other markets might be heading,” he said.
Apparently convinced that Boston’s real estate market is nearing its peak, more homeowners there are putting their property up for sale, said real estate agent Alla Iokhes.
Homeowners are “probably afraid that it’s going to get worse next year,” she said.
“It used to be a seller’s market. Now it’s gotten to be a buyer’s market.”
