Though residential real estate markets have generally remained stable this summer, some parts of the country are reporting weakness, especially in the upper price brackets, according to the latest economic summary from the Federal Reserve Board

And perhaps as another portent of things to come, the Comptroller of the Currency is worried that houses in some places could start losing value.

In warning national banks to be wary, Deputy Comptroller Nancy Wentzler reminded reporters recently that housing values dropped 8 percent on average during the last recession in 1991. Not only could it happen again, she said, it could "happen rather abruptly."

If the Fed's latest "Beige Book" report is any indication, the slow down may have already started in the districts served by the Boston, Chicago, San Francisco, Dallas and Kansas City federal reserve banks.

In the first federal reserve district, the Boston bank reported that while the overall housing market is still strong, "signs of softening are emerging." The number of listings are beginning to slow, as are the number of sales. While low loan rates continue to stimulate demand in the lower half of the market, officials said, activity "at the top has slowed."

In the seventh district, the Chicago bank says residential real estate continues to show remarkable resiliency in the face of slower economic activity and increasing joblessness. But there is "some slackening" in demand for higher priced homes.

A similar report comes from the 11th district, where the San Francisco bank reported "a slowdown" in the high-end market in the San Francisco Bay area. Bank officials also noted a decline in some rental rates, which could lead to a slowdown in multi-family construction activity.

Ditto for the second district: Sales mixed but generally strong, the New York bank reported. The market for starter homes is particularly strong. But there are "signs of cooling" in high-priced Westchester County, where sales are down substantially and price appreciation has slowed.

The Dallas bank has even gloomier story for the 11th District: Though activity in the $150,000 price range remains "brisk," the markets at 200k and above have hit the skids. "Some contacts reported as much as a 20-30 percent sales decline from the beginning of the year," officials there reported.

Sales of homes priced above $200,000 have been "particularly slow," the Dallas bank said, noting that there are indications the market in this price range is overbuilt. And "many $1 million homes are sitting on the market."

Elsewhere, though, residential real estate seems to bouncing along quite nicely. The Atlanta, Cleveland, Minneapolis, Richmond and St. Louis districts all reported good demand for low and moderately priced houses. In some areas, houses "priced right" continue to sell quickly, often attracting multiple offers in the process.

Meanwhile, Deputy Controller Wentzler is worried enough that a crisis could be just around the corner that her office has advised the national banks it oversees to take a look at their book of mortgages to make sure they are not over-exposed.

"What we are suggesting from all the models we are doing is to watch this carefully make sure we stress test for a potential rather steep and decided drop in house prices that could effect collateral values at banks," she said.

Specifically, Wentzler is concerned that banks could be hit by a double whammy an increase in delinquencies compounded if appreciation goes flat and an increase in foreclosures if layoffs accelerate.

Stay tuned.

For more articles by Lew Sichelman, please press here.

Published: August 13, 2001

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