- The Washington Times - Wednesday, May 25, 2005

A torrid sales pace sent average home prices soaring last month to more than $200,000 for the first time, capping the biggest yearly gain in home prices in a quarter-century, the National Association of Realtors reported yesterday.

Prices nationwide rose 15 percent over the year to $206,000, with a 6.8 percent spurt last month spurred by a sharp decline in 30-year mortgage rates.

The 7.2 million annual sales rate for existing homes, town houses and condominiums, a record, was the latest sign that the housing market is defying predictions of its demise this year.

“We see all the positive factors coming together,” said David Lereah, chief economist of the Realtor group, including accelerating job gains, rock-bottom mortgage rates and demographic trends that have boosted sales.

During the past decade, analysts say, an increase in the number of immigrants buying houses has bolstered the market. More recently, the housing market has been driven by a wave of second-home buying by baby boomers in their peak earning years and nearing retirement.

Second homes and investment properties have accounted for a significant proportion of sales in major urban areas, including Washington. Investors also are buying second homes in potential retirement and vacation destinations on the coasts and in the sunshine states of Florida, Arizona and California.

The unexpected strength in home sales is one of the reasons economists are raising their forecasts for growth this year. But the housing market’s seemingly endless string of broken records in the past four years also is causing concern that there may be bubbles in some areas.

Housing prices have been hitting records nationally and locally, where the average price for a home topped $371,000 early this year, and are doing so at accelerating rates.

The last time there was a 15 percent annual increase in house prices was in 1980, when double-digit inflation prevailed. In Washington, price gains have topped 20 percent in each of the past two years.

Federal Reserve Chairman Alan Greenspan noted the “froth” in the housing market in a speech last week to the Economic Club of New York. The market’s resilience has defied a series of increases in short-term interest rates engineered by the Fed in the past year.

“We don’t perceive that there is a national bubble, but it’s hard not to see … that there are a lot of local bubbles,” Mr. Greenspan said. He has predicted that prices will drop in some places where they are flying too high.

Mr. Lereah and a growing number of real estate industry professionals agree. “Prices are now becoming a concern. There’s a speculative element in home buying now,” Mr. Lereah said.

Some say surging home prices are proof that housing outperforms stocks, bonds and other investments.

“The dynamics of the market underscore the value of housing as a solid long-term investment,” said Al Mansell, chief executive of Coldwell Banker Residential Brokerage in Salt Lake City.

The price pressures have been exacerbated in Washington and other areas by restrictions on development that have prevented the supply of new homes from keeping up with growing demand for housing.

Mr. Mansell said the shortage of homes is “significant” nationwide. The report yesterday showed a 4.2-month inventory of homes available at the current sales pace — down from 4.7 months earlier this year but higher than last year’s tight levels of four months or less.

Soaring home values have provided an important supplement to income and support for the economy in recent years. Consumers have been quick to tap into their rising home equity to finance purchases of other things, from vacations to college education.

“More cash in the hands of consumers … bodes well for retail sales,” said Peter Morici, business professor at the University of Maryland, who predicts that economic growth will hit a healthy 3.5 percent in the second quarter.

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