Americans, who in some areas of the country have seen the value of their homes double in the last five years, may suffer price declines within the next two years.
"We certainly have not bottomed out yet," Tom Stevens, president of the National Association of Realtors, said to a Senate committee accessing the risks to the economy from a possible collapse in housing. "Prices will continue to decline."
The four-member industry panel testifying before a joint hearing of Senate banking subcommittees agreed that states with the biggest increases in prices over the last couple of years — including Florida, California, and Nevada — were more at risk for declines.
Still, the 56 percent surge in home values nationally over the last five years increased the odds that prices would drop overall, panel members said.
"The scope [of the gains] does cause some concern," said Richard Brown, chief economist at the Federal Deposit Insurance Corp. (FDIC). "It's really unprecedented."
While the evolving housing slowdown will depress economic growth though the middle of 2007, it probably won't be severe enough to push the country into a recession, said David Seiders, chief economist at the National Association of Home Builders.
Other areas of the economy — including business investment, exports and commercial construction — are likely to soften the blow from a drop in residential building, Seiders said.
Unlike previous declines in home prices that were preceded by recessions, it won't take a contraction this time around to push down overheated areas, said Patrick Lawler, chief economist at the Office of Federal Housing Enterprise Oversight (OFHEO).
"The exceptional size of some of the recent increases could make them vulnerable without a recession, especially if interest rates continue to rise," Lawler said.
While OFHEO'S statistics show home prices during the five-year boom increased 56 percent nationally, five states and the District of Columbia had triple-digit gains. Home prices in Washington, D.C., surged 120 percent, followed by a 113 percent jump in Florida, a 112 percent increase in California and a 105 percent rise in Nevada.
OFHEO'S home-price gauge, considered one of the most reliable because it tracks sales of the same house, rose in the second quarter at the slowest pace in seven years, the federal government regulator reported last week.
The measure rose an average of 1.17 percent during the period, compared with 3.65 percent growth in the second quarter of 2005.
The deceleration was the biggest since the agency began keeping records in 1975.
Asked by Sen. Jack Reed, D-R.I., if he agreed with some forecasts that prices as measured by OFHEO would drop 3 percent in the next year, Lawler said it was "certainly something that could happen and is a matter of concern for us."
So far, most economists agree the decline has been gradual. The Mortgage Bankers Association reported Wednesday that mortgage applications rose to the highest level in more than three months after a recent decline in borrowing costs spurred home buying.
The group's gauge of purchases increased to a nine-week high.
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