Economists see US housing near peak

WASHINGTON - Rebuilding after Hurricane Katrina should boost an already hot US housing market, but it will only delay an eventual cooling that could bring a significant slowdown in the rate of home price appreciation and dent consumer spending, economists say.

"The housing market is peaking," said Mark Zandi, economist at Economy.com. "We haven't seen it yet but I do think the market is peaking." Zandi and other economists at a National Association of Home Builders conference said the five-year run in the housing sector should start to taper off as long-term interest rates rise and homes in the priciest areas become more unaffordable.

Already, affordability is at its lowest since 1991, said David Berson, Fannie Mae's chief economist. In fact, recent data showing weeks of declining mortgage applications could indicate a housing slowdown has begun, Berson said.

"The basic problem is you have huge bubbles, great big bubbles, on the coasts," said David Wyss, chief economist for Standard & Poor's.

Homes in California, Florida and along the East Coast are overvalued, Zandi said. Prices there have climbed annually by double-digit percentages, according to government data. Almost one-third of the top 100 metro areas posted price appreciation of more than 20 per cent over the 12 months to June.

Such rapid appreciation, according to some of the economists, has allowed homeowners to use their houses as cash machines -- extracting equity and using the funds to make purchases elsewhere, contributing significantly to consumer spending and helping the overall US economy grow, they said.

But as long-term interest rates climb and homebuyer demand wanes, prices will cease to soar at such historically high rates, economists said. While nationally prices may continue to increase they could decline in the hottest markets where the greatest share of equity extraction has taken place.

In the United States, income from mortgage equity extraction has accounted for some 7 per cent of total disposable income this year, Zandi said. But in some areas of California, for example, it accounts for up to 22 per cent of such income.

Declines there could weaken consumer spending throughout the economy, according to some economists.

Economists have been warning of a slowdown in the housing sector for years but so far they have been wrong.

Many started 2005 projecting high but not record levels of construction, sales or price growth, but by the third quarter economists had revised those forecasts to peg this year as a record one and push the slowdown to 2006.

David Seiders, the home builder group's chief economist, said some sector participants believe enough of the nation is exhibiting worrying characteristics, such as ever-widening gaps between income gains and home price appreciation, reliance on nontraditional mortgages to achieve affordability and the presence of real estate speculators.

Zandi said he was wrong in the past because he didn't anticipate stubbornly low long-term rates, the creativity of the mortgage market to create such a variety of products to extend affordability, or the persistence of investors.

Now, long-term rates look more poised to increase and banking regulators have urged lenders to tighten their underwriting standards. Those factors, Zandi said, will lead to the collapse of affordability.

Fannie's Berson also anticipates the market will slow and said price appreciation could decline to a rate of 3 to 5 per cent per year, but he would not say when that leveling off would begin.

Long-term fixed-rate mortgage rates have begun to climb after largely ignoring rising short-term borrowing costs. The Mortgage Bankers Association earlier Wednesday said the 30-year fixed-rate mortgages rose to 6.09 per cent in the latest week, higher than the year-ago level of 5.64 per cent.

US housing starts jumped 3.4 per cent in September and permits for groundbreaking surged to a 32-year high, defying forecasts for a slowdown in construction following hurricanes Katrina and Rita, government data showed on Wednesday.

However shares of home builder companies were broadly lower on Wednesday. The Dow Jones US Homebuilders index was off more than 16 points, or 1.95 per cent, in afternoon trading. So far this year, the index is up 1.3 per cent.

- REUTERS