- The Washington Times - Tuesday, May 14, 2002

Washington-area home prices soared by 20 percent in the past year while the economy was in recession a second year of double-digit gains that created a cushion of wealth for homeowners and helped to make the downturn the mildest in history for consumers.
"Housing continues to surprise," said Harvey Rosenblum, president of the National Association of Business Economists, which released a survey yesterday showing that two-thirds of economists credit the resilient housing market for reducing the severity of the recession.
The jump in the area's median home price to $229,100 came during a record quarter for sales of existing homes, with the annual pace of sales hitting 6.54 million nationwide for the first time from January to March, the National Association of Realtors reported yesterday.
The unusually strong housing market has defied predictions of its demise in recent years. It proved to be a critical, hidden strength that bolstered the finances and confidence of Americans during the recession, enabling them to spend and keep the economy from total collapse.
Economists expect growth in the housing market to slow in the next year. But the sizable price gains should stick, they say, despite predictions by some that such sharp increases are unsustainable and will at least partially reverse when the housing bubble inevitably bursts.
With the housing wealth of the United States' middle class increasing by trillions of dollars in recent years, the two-thirds of families who own their homes have proved adept at tapping into their gains through home equity loans and cash-out mortgage refinancings.
Such transactions hit record levels in the fall during the depths of the recession, helping to finance a buying binge on cars, sport utility vehicles and other big-ticket items.
"Don't bet against the consumer," said Ed Yardeni, chief investment strategist with Prudential Securities. As long as increasing incomes and low interest rates give consumers the wherewithal to buy, the "American dream" of building wealth through homeownership will be a primary goal, he said.
Adjusted for inflation, household incomes defied historical trends and continued to grow throughout the recession, except for a brief pause last fall after the September 11 terrorist attacks precipitated mass layoffs.
When combined with 30-year mortgage rates averaging less than 7 percent, houses remained affordable for most Americans despite the sharp gains in prices.
Affordability has become an issue for the one-quarter of Americans who have not built up enough savings or income to buy homes, especially in major urban areas such as Washington, where price increases since 1999 have outpaced the national average.
The U.S. median price of an existing home rose 8 percent to $150,900 in the first quarter compared with a year ago.
David Lereah, chief economist of the Realtors association, said the ratio of home prices to family income has risen to nearly 3-to-1, putting it at the high end of a range between 2.5 and 3 in the last quarter-century.
But he said housing remains affordable for most. "We expect we'll be able to preserve the balance between home prices and family income in the future."
While posing an obstacle to first-time home buyers, the outsized price gains in the past two years gave a significant boost to homeownership because they compared so favorably with the stock market's declines since March 2000.
For the average American, analysts say housing catapulted back to the top as the investment of choice, after a brief reign by stocks in the 1990s. For decades, in any case, homes not stocks have been the principle source of wealth for the middle class.
The price gains have been stoked by a combination of strong demand for houses and limited availability of homes for sale, economists say. Developers have remained conservative about building plans despite robust demand, suggesting that an emerging glut of supply is unlikely to undermine the increases.
While some economists say the housing market has peaked and will not be able to repeat its stellar performance in the next year, others say the outlook has only brightened as the economic recovery sets in.
A survey released yesterday by Manpower Inc., for instance, found that more than a quarter of Washington-area businesses plan to hire this summer, the first reported pickup in hiring plans since the recession.
"Employment gains will further reinforce real income" and confidence, said Sung Won Sohn, chief economist of Wells Fargo & Co., who predicted that consumer spending will remain strong and be the backbone of the economy.


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