Bullish on housing, no letup in sight

Demand for housing has gone from red-hot to white-hot.

Almost every month, the housing market sets another record, and home prices are continuing to climb - in some areas at annual rates of more than 20 percent.

This week's data continue to show the strength of the housing market. Yesterday, the government reported new-home sales set a record in April, a day after it reported that existing home sales grew at a record pace. At the same time, the national median home price is up 15.1 percent in the past year - and according to one survey released yesterday, luxury homes in the Los Angeles area rose by 23 percent in the first quarter, with an average price of more than $2 million for the first time.

There is no sign that demand is flagging, says Richard DeKaser, chief economist at National City Corp. in Cleveland. He says mortgage applications hit a record in April and are even stronger in May.

"The leading indicators are more bullish still," he says. "All indications are we have not yet seen the peak."

The sharply rising prices have caused Federal Reserve chief Alan Greenspan to talk about "froth" in the real estate market. However, even as the Fed has been raising interest rates, long-term mortgage rates have come down. A 30-year fixed-rate mortgage is now about 5.7 percent, down more than half a percentage point since the Fed started raising interest rates last June.

"Until the mortgage rates hit 6.5 percent, the housing market is not likely to lose any steam," says Anthony Chan, chief economist at JPMorgan Asset Management in Columbus, Ohio.

Normally, long-term rates also rise when the Fed boosts rates. However, Mr. Chan says bond investors have decided that "the war on inflation is over. The Fed is just wrapping things up."

The largest increases in home prices are in the arena of existing homes (those previously owned). Yesterday, for example, First Republic Bank released its Prestige Home Index which tracks luxury homes in California. It found that compared to a year ago, home prices rose almost 14 percent in the San Francisco Bay area, 20.4 percent in San Diego and 23.1 percent in Los Angeles.

The big rise in California is not surprising, says DeKaser, who has done a study of overvalued areas. "Eight out of 10 are in California," he says.

Despite the sharp rise, he says history shows that price corrections usually take place in the context of a broader economic slowdown. At the moment there are no signs of such a slowdown, he says. "I am not of the view there is an imminent bubble that will crack this year."

Median prices of previously owned homes

Region/ April 2005/ One year % change

US $206,000 15.1 %

Northeast 243,000 15.2

Midwest 166,000 12.9

South 176,000 8.0

West 305,000 21.0

Source: National Association of Realtors.