Without an ankle bracelet tracking device, it's hard to know where dot-com day-traders, housing investors and commodities speculators are stampeding next, but one thing is certain, a cooling housing market doesn't mean the end of opportunity.

Opportunity could be cycling back up again.

At a Chicago banking conference yesterday, Federal Reserve Chairman Ben Bernanke tried to soothe worried markets that the said U.S. residential housing market is cooling in an orderly and moderate fashion, he admits that rising interest rates are making buying a home more difficult.

After five years of record sales, and a 14-year run, according to research performed last year Harvard University's Joint Center for Housing Studies, a cooler housing market is bound to impact economic growth going forward.

Some say it already has, despite inflation rearing its ugly head causing economists to assume that the Fed is far from finished raising short-term interest rates. Long-term interest rates will follow, or the economy will move into recession.

In fact, the situation is exactly as the Harvard researchers predicted a year ago -- that the hot housing market is masking "eroding affordability and mounting risks."

It's the risks that are slowing housing:

• buying a home costs approximately 30 percent more than renting a comparable home

• double digit housing inflation took place in one third of the largest metros in 2004-2005

• condominiums have appreciated three times the rate of single-family homes since 2000

• housing costs coupled with doubled energy costs is slowing homebuyers

• goods that have been cheaper because of imports, such as clothing, are suddenly more expensive

• May 2006 mortgage interest rates are at a four-year high

• while the economy grew at 4.8 percent in the first quarter of 2006, some analysts expect a slowdown to around three percent

Housing drives approximately 40 percent of the consumer price index, says the government, which calculates such things by excluding food and energy, but including housing rental costs. Curiously, the CPI index does not include housing costs to buy a home.

With high home prices forcing many homebuyers out of the market, rents are rising, which in turn is causing inflation to appear worse.

Observes Marketwatch reporter Greg Robb, the government uses an "owner's equivalent rent" as a measure as if the owner were paying rent to himself. Some complain this is an inaccurate number because its imaginary where as real rents are quantifiable.

If inflation escalates in real terms, that could have a trickle down effect on consumer spending and jobs. As it is, builder confidence was at its worst level in 12 years, and housing starts and building permits are down.

But a funny thing is happening. While sales slowed in 2006, home price appreciation grew. In fact, the rate of appreciation is about the same as it was from 2001 to 2005, when sales set records for five consecutive years.

NAR's first-quarter metro area single-family home price report, covering changes in 149 metropolitan statistical areas, showed 60 areas with double-digit annual increases and only 16 metros experiencing price declines.

David Lereah, chief economist for NAR says, "A steady rise in mortgage interest rates has slowed home sales in higher cost areas, yet job growth in some moderately priced markets is boosting sales in other areas," he said. "The net effect is a modest decline in home sales for the nation as a whole, but sales remain historically strong and are providing a solid underlying base for the overall economy."

While homes sales are off five to 20 percent in the hottest markets, the national median existing single-family home price was $217,900 in the first quarter, up 10.3 percent from a year earlier when the median price was $197,600.

So what's driving housing to continue at near-boom rates? Affordability, says Lereah.

"Quite simply, affordable metros are in favor and unaffordable metros are experiencing a correction," he says.

Published: May 19, 2006

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