New York, NY, June 23--There is no bubble in national home prices, and even if regional house prices do fall that will not pose a threat to the overall U.S. economy, the New York Federal Reserve Bank said on Tuesday.
The increase in house prices in recent years has been in line with declining mortgage rates, a factor that many arguments about a housing bubble ignore, the New York Fed said in a study.
"Our analysis of the U.S. housing market in recent years finds little evidence to support the existence of a national home price bubble," senior economist Jonathan McCarthy and vice president Richard Peach said.
The study has important implications for Federal Reserve policy, because evidence of housing bubbles in both Britain and Australia has influenced their central banks to raise interest rates in the past year to cool the market.
While the Federal Reserve is widely expected to start raising its benchmark rate at a policy meeting next week, officials have said they want to get the 1.0 percent federal funds rate back up to levels more consistent with a strong economy, and are not targeting housing prices.
The New York Fed study said although house prices have risen strongly, increases in family income and low mortgage rates have meant that homes have remained affordable, while demographic forces have also supported demand.
"The most widely cited evidence of a bubble is not persuasive because it fails to account for developments in the housing market over the past decade," the economists said in a forthcoming study entitled "Are Home Prices the Next 'Bubble'?"
Some economists worry that the run-up in housing prices in recent years has created a bubble similar to the stock market excesses of the late 1990s that could jeopardize the entire U.S. economy if prices fall sharply.
The New York Fed study cited central bank figures showing households held about $14.6 trillion in real estate at the end of the third quarter of 2003, or more than 130 percent of U.S. gross domestic product (GDP).
That is more than the $12.8 trillion held in equities and mutual funds at the peak of the stock market in early 2000. Much of stock wealth is concentrated among the rich, whereas housing is the major asset for most households, the Fed study noted.
The Fed economists said the rapid increase in home prices of itself was not evidence of a bubble.
"Rather, it appears that home prices have risen in line with increases in personal income and declines in nominal interest rates," McCarthy and Peach wrote.
The average mortgage rate has fallen from a bit over 10 percent in 1990 to about 5.75 percent in 2003. Meantime, the Federal Reserve slashed official rates 13 times from January 2001 to June 2003.
The study said even if house prices soften in California and the Northeast, past experience suggested that would not be enough to push the U.S. economy into recession.
Official figures show average U.S. home prices rose 7.7 percent in the first quarter compared with a year earlier.
