You can look at the latest national survey of home value appreciation in at least three ways: If you're a worrier, you can say,oh no, the rate of appreciation for the average American home decreased from an annualized 8.1 percent to 6.6 percent in the last three months. That's a sure sign that housing is the latest victim of the weakening economy. Things can only get worse in the months ahead.

Or, you can take a more positive approach and say: Wow! At a time when the U.S. economy is on the verge of recession, isn't it astounding that home values rose by an average 6.6 percent in the latest quarterly survey by mortgage market giant Freddie Mac?

Finally, you can mix the good with the bad: A 6.6 percent rate of home value appreciation is indeed extraordinary in the face of a 0.4 percent decrease in the Gross Domestic Product (GDP) during the same quarter. But with layoffs topping 400,000 last month and the unemployment rate at 5.4 percent and headed higher, there's simply no way home values can continue to jump at 8 and 9 percent annual rates nationwide. At some point, they've got to cool down, and that's where we are today.

Freddie Mac's third quarter housing appreciation study, based on refinancing and sale transactions in a giant 14.8 million sample of American homes, represents the first national statistical confirmation that the cool-down in property values has begun. But Freddie Mac's principal economist, Amy Cutts, considers the 6.6 percent appreciation rate "huge" in the face of the decline in the GDP during the same quarter.

The latest data do not reflect market changes in the wake of the September 11 terrorist attacks. The refinancings and home sales transactions covered by Freddie Mac's survey were closed or contracted for during July, August and September, too early to register any aftershock impacts on home values.

In an interview with Realty Times, Cutts said she expects a drop in the rate of appreciation during the current quarter, down to an average 2 to 3 percent annualized gain in value. That will still represent a strong performance for housing, however, since most economists are forecasting a decline in the GDP by 1 to 2 percent. Cutts believes the 2 to 3 percent national appreciation rate will continue for at least six months, but that some formerly hot local markets -- such as San Francisco, San Jose and other parts of California -- will experience net housing value declines during the same period.

But even in the face of a recession, Cutts predicts that the average American home will continue to grow in value, albeit at a slower rate than during the last five years. The key reasons for housing's ability to outperform the rest of the economy? Interest rates and federal tax policies.

As long as mortgage interest rates remain near their 30-year lows of the present -- and there is nothing in sight that would push them up -- consumers can continue to support rising home prices, even in a recession, according to Cutts.

Similarly, a home purchase continues to be the most tax-favored investment Americans can make, bar none. With essentially zero capital gains taxation for most sellers, plus deductions for mortgage interest and local property taxes, "there is a psychology of wealth" connected with housing expenditures unlike any other asset, says Cutts. Absent changes to those key supports, home values should continue to outperform -- and prop up -- the economy as a whole.

For more articles by Ken Harney, please press here.

Published: November 19, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.