Housing Slump Could Lean Heavily on Economy

Housing Slump Could Lean Heavily on Economy - Housing Slump...

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Unformatted text preview: Housing Slump Could Lean Heavily on Economy By David C. Wheelock, Economist Federal Reserve Bank of St. Louis http://stlouisfed.org/publications/re/articles/?id=35 During the recent housing boom, U.S. house prices seemed to shoot up faster than crabgrass. Homeowners enjoyed an average increase of 54.4 percent in the value of their houses between 2001 and 2005, as measured by a house price index produced by the Office of Federal Housing Enterprise Oversight (OFHEO). 1 However, as Tip O'Neil, the former speaker of the U.S. House of Representatives, used to say about politics, all housing markets are local. The extent to which a given homeowner saw an increase in the value of her house during the boom was largely determined by its location. Between 2001 and 2005, houses in the Port St. Lucie-Fort Pierce, Fla., area rose in price by an average of 144 percentthe largest increase of any U.S. metropolitan area. By contrast, house prices in Lafayette, Ind., rose by a mere 11 percent on averagethe smallest increase among U.S. metropolitan areas. The 10 metropolitan areas with the largest increases in house prices were all located in either Florida or California, whereas four of the markets with the smallest rises were located in Indiana. Figure 1 Ratio of House Prices to Income Varies Dramatically Across States The figure shows the ratio of the OFHEO house price index to median household income (index divided by income) for selected states and the country. The ratio increased by about 50 percent between 1999 and 2005 for the United States as a whole. It rose by nearly 90 percent in Florida, by over 100 percent in California, by 38 percent in Missouri and by just 22 percent in Texas. Historically, differences in income and population growth largely explain why house prices rise at different rates in different markets. In June 2005, the U.S. Census Bureau announced that Port St. Lucie was the fastest- growing city in the United States; so, the rapid rise in that city's house prices is not surprising. Many other cities that had large increases in house prices during the boom also had rapidly growing populations. However, the phenomenal rise in house prices in some markets during the past five years has left many analysts questioning whether such fundamentals as population and income growth alone can explain the recent boom....
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This note was uploaded on 07/07/2011 for the course BUSINESS 350 taught by Professor Mitchell during the Fall '09 term at Troy.

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Housing Slump Could Lean Heavily on Economy - Housing Slump...

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