Home Prices Rise in 1999

Home values are up in 1999, and so are the fortunes of home sellers and the housing industry, as demand for homes continues to keep prices high. The spike in prices means a drop in purchasing power for the average homebuyer, when combined with this year's interest rate hikes. The Wall Street Journal says that affluent homebuyers are feeling the squeeze, too. Right now, even a half-million dollars doesn't buy as much luxury as in years past.

Home values rose at the annualized rate of about 5% in the first half of 1999, according to Freddie Mac, and show no clear signs of decreasing in the third quarter. Prices have been climbing most rapidly this year in the Midwestern states of Illinois, Indiana, Michigan, Ohio and Wisconsin, at a 7.2% pace in 1999, and a whopping 30.7% over the last five years. Other Midwestern states are keeping pace, posting a 28.4% increase over the same five-year period. The Mountain states grew the fastest at 32.4%. Slower growing are the Mid-Atlantic States of New York, New Jersey and Pennsylvania, at only 12.8% for the five years, the Conventional Mortgage Home-Price Index says.

What's in the cards for later this year? A robust housing market should continue, says Freddie. "This is consistent with the strong performance of the housing market and the continued good health of the economy overall," said Amy Crews Cutts, senior economist at Freddie Mac. "The recent rise in interest rates is expected to dampen some of the enthusiasm that housing has enjoyed over the past year, but 1999 could well be the second consecutive year of record performance."

The Wall Street Journal recently found that high-end homes in some markets have inflated so much that the $500,000 benchmark is starting to lose its meaning. Half-million dollar homes no longer feature the luxury amenities that high-end buyers used to take for granted at that price. The Journal's house hunt covered nine cities where average housing prices have jumped as much as 40% during the past five years.

A sampling of the luxury market yielded the following examples, among others. In Duluth, Minnesota, an "executive-type house" fetches $250,000. The Journal found a $525,000 home listed at 4,700 square feet with five bedrooms and ten acres with a view. But that was one of the larger homes. In Greenwich, Connecticut, a $514,000 listing featured a house in a state of disrepair with only 2,166 square feet, four bedrooms and one-fifth of an acre. In Palo Alto, California, where real estate is out-of-sight, $469,000 was the listed price for a tiny 2-bedroom with only 925 square feet.

There's a bright side to the tale of woe, however, according to some housing experts. Even though mortgage interest rates have gone up this year, they still are low by historical standards, and higher prices are balanced by lower mortgage rates.