Growth Slows in Housing Market

Appreciation Rate Lowest Since 1999

In the latest evidence of a cooling housing market, U.S. home prices rose in the second quarter by the slowest rate in more than six years, according to a government report released yesterday.

Home prices were 10 percent higher in the three months ended June 30, compared with the corresponding period last year. The quarterly appreciation rate of 1.17 percent, however, was the slowest since the fourth quarter of 1999, according to the analysis by the Office of Federal Housing Enterprise Oversight.

In contrast, in the second quarter of last year -- which many analysts describe as the height of the recent boom -- the quarterly rate was 3.65 percent. The change in the rate between those two quarters was the sharpest decline since the agency began tracking the data in 1975.

"These data are a strong indication that the housing market is cooling in a very significant way," James B. Lockhart, the agency's director, said in the report. "Indeed, the deceleration appears in almost every region of the country."

The ballooning number of homes for sale and higher interest rates have put a brake on rising home prices, analysts said. The housing market also had been "artificially propped up" by speculators and "mortgage gimmicks," said John H. Vogel Jr., professor of business administration at Dartmouth College's Tuck School of Business. Many economists think interest-only, adjustable-rate and other exotic mortgages helped people buy homes they otherwise may not have been able to afford in the recent housing boom.

"You just see all these for-sale signs out there," he said. "If you're a buyer . . . it makes you question, 'Do I really have to stretch that far to buy a house?' "

What is notable about the report -- the latest in a series of statistics this year that point to a downturn in the housing market -- is the rapidly declining rates of appreciation in prices in regions that were once red-hot. The quarterly report is based on comparisons of prices of the same houses sold or refinanced over time.

For example, just last year in the South Atlantic region, which includes Maryland, Virginia and the District, appreciation was at its highest rate since 1975, with home prices rising 18 percent year over year. The change in the quarterly rate over the past year was the biggest drop since the second quarter of 1976.

Places such as Massachusetts experienced some of the biggest price gains in the country throughout much of the housing boom. But now, the state ranks 48th in appreciation rates.

California cities used to pepper the list of the metropolitan areas with the highest rates of appreciation. Now, there is just one in the top 20 -- Bakersfield, with a year-over-year price gain of 22 percent.

"The issue is that a number of states appreciated at rates that are just not sustainable over the long term," Andrew Leventis, an economist with the federal agency, said in an interview.

In the market that includes the District, Northern Virginia and Prince George's, Charles and Calvert counties in Maryland and Jefferson County in West Virginia, home prices increased by 1.79 percent in the second quarter. But the region posted a year-over-year increase of 16 percent because of jumps in prices late last year.

In the Montgomery County-Frederick County market, which the agency measures separately, the second quarter saw a home price gain of 1.64 percent over the first quarter and 13 percent over the same period last year.

Of the nation's largest 275 metropolitan areas covered in the report, seven regions experienced year-over-year price drops, including Ann Arbor and the Detroit-Dearborn region in Michigan. All declines were less than 2 percent.

Vogel thinks this is just the beginning. Housing prices have become so out of line with people's ability to buy, he said, that barring a wage spurt, it won't be possible to escape significant price declines.

"It won't be just prices flattening," he said. "I think it's going to be a pretty hard landing."