Thursday, February 17, 2005

Will this housing boom go bust?

FDIC investigates causes of house-price booms

The rapid rise in U.S. home prices, increasing almost 50 percent overall over the last five years, has created a hot-button debate over whether Americans are staring at a possible home-price collapse.

The growth in home prices over the past year surpasses any increase in the last 25 years, according to data released by the Office of Federal Housing Enterprise Oversight, which tracks average quarterly house-price changes. Some economists have raised an eye to this unprecedented run-up in prices, saying it may be cause for concern.

In evaluating what the recent housing boom could mean for the nation's homeowners, the FDIC in a report titled, "U.S. Home Prices: Does Bust Always Follow Boom?" attempts to define housing booms and busts and considers what causes them. The FDIC finds that while home-price booms cannot sustain forever, not all booms end in busts.

Sixty-three U.S. metropolitan areas experienced at least one housing boom since 1978, and 24 cities experienced more than one boom, according to the report. The FDIC defines a "boom" as a 30 percent or more increase in inflation-adjusted home prices during any three-year period.

"Geographically, home-price booms have been concentrated in cities in California and the Northeast, which account for almost 70 percent of our 63 boom markets," the report states.

The FDIC defines a "bust" as an inflation-adjusted price decline of 15 percent or more in five years. Using these criteria, some 21 cities were found to have experienced a housing bust at some point over the last 25 years.


No comments: