The housing price appreciation bandwagon rolls on, according to a new federal quarterly study released last Wednesday. But the 12.5 percent average jump in the value of an existing home in the U.S. between first quarter 2004 and first quarter 2005 "raises the potential for declines in some areas later on," according to the chief economist of the Office of Federal Housing Enterprise Oversight (OFHEO), which conducts the government's definitive housing price study quarterly.

The 12.5 percent average gain flies in the face of widespread predictions of "bursting bubbles" by economists and bearish Wall Street analysts. With mortgage interest rates down again last week -- pushed by lower yields in the global bond market -- the critical fuel for hot housing prices appears likely to remain plentiful.

Home prices continue to outperform every other major sector in the U.S. economy, noted Patrick Lawler, OFHEO's chief economist. The Consumer Price Index gained just 3.1 percent during the 12 month period covered by the latest study; housing prices grew four times as fast.

Nevada continued to hold on to the number one spot as hottest housing market in the country. Average home values rose there by 31.2 percent during the year. California moved into second place with a 25.4 percent average appreciation rate -- a stunning number given the state's already high housing costs. Hawaii (24.3 percent gain), the District of Columbia (22.2 percent), Florida (21.4 percent) and Maryland (21 percent) rounded out the six states where average gains exceeded 20 percent.

Arizona, where houses had been appreciating at single digit rates for several years, caught fire in the past 12 months, with an average price gain of 19.4 percent, seventh highest in the country.

The mid-Atlantic and New England were regional hot spots, with most states exceeding the national average gains by wide margins. Virginia (18.6 percent), Rhode Island (17.1 percent), New Jersey (15.8 percent), Vermont and Delaware (14.8 percent), Maine (14.1), New York (13.5) and Connecticut (13.4) were particularly strong gainers. Only Massachusetts, which had been ranked among the top 10 high appreciation states for much of the past decade, dropped to 20th place -- and below the national average -- with a one-year gain of 11.6 percent.

The lowest-appreciating states all had rates in excess of the CPI inflation rate of 3.1 percent. Texas, which was the slowest gainer in the latest federal study, nonetheless managed a 3.8 percent average increase. Indiana (4.1 percent), Colorado and Kansas (4.8 percent) rounded out the bottom group. Utah, which had been in last place in recent years, came alive in the last 12 months and jumped to number 35 in the nation with a 6.3 percent average appreciation rate.

"There are a number of likely reasons for the sustained rapid price increases," said chief economist Lawler, including real income growth, the low cost of mortgage money, and "the apparent impact of speculation in some markets."

The full OFHEO quarterly price appreciation study can be found at their website.

Published: June 6, 2005

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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, consumer 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.