A press release from Freddie Mac says home values haven't grown this high since 1980 and questions whether or not current prices are sustainable. Here's a snippet from the release:

"The large annual increase in house prices in the second quarter Conventional Mortgage Home Price Index (CMHPI) was a result of record low interest rates in June of 2003 and near-record lows in mortgage rates in March of this year," said Amy Crews Cutts, Freddie Mac's deputy chief economist. "After three years of declining mortgage rates and big jobs gains earlier in the year, housing demand is as strong as we've ever seen it. The housing market should remain strong for the next several quarters, but may begin to slow from record levels as interest rates start to gradually rise."

The second quarter's quarterly growth rate is a 50 percent increase over the first quarter's rate. Nationally, home values increased by an annualized rate of 9.8 percent in the second quarter of 2004. The first quarter 2004 annualized growth rate was revised upward to 6.5 percent.

What the release doesn't point out is that real estate markets, unlike the stock market or the bond market, varies from state to state, from neighborhood to neighborhood and from block to block. Sales will undoubtedly slow more in some places than in others when rates begin to rise, but slowing sales probably will not occur until rates reach a level of around eight percent. Will this create a bubble effect for home values? No, but prices will level off for a period of time and appreciation will definitely slow, as price appreciation is dependent upon demand and lower interest rates allow buyers to buy more, thus, increasing demand and lowering the supply of available homes. Once demand slows to a certain level, supply will increase, slowing appreciation and causing prices to level off.

I received a postcard in the mail the other day from a fellow Realtor inciting me to sell now because prices are high and rates are low. Low rates create an environment where homes stay on the market from two to five days if they're priced right, 12 to 18 days if they're slightly overpriced. Profit levels for home sellers are amazingly high, especially if they purchased their home or condo in the 1980s or early to mid-1990s.

Waterfront, luxury and beach area properties are still expected to appreciate nicely even with rate increases, as buyers for these properties typically are not dependent upon low rates in order to buy. Current appreciation rates for these properties are at around 25 percent a year, on average. Rate hikes may or may not push them down to 20 percent, but my belief is that they will not lose appreciation, as they were unaffected the last time prices for other properties throughout my region leveled off in price.

This post is also posted at Hundred Acres.

-John Mudd
"Mr. Real Estate"