Housing Price Appreciation Cooling Slightly

by Kenneth R. Harney

The housing price appreciation boom isn't dead, it's shifting to new real estate markets. Arizona and Florida are on fire, but San Diego and Boston -- once the hottest markets in the country -- are now distinctly moving into a cooling phase.

The third quarter appreciation report issued by the Office of Federal Housing Enterprise Oversight (OFHEO) last Wednesday documented a modest decline in the national average annual appreciation rate -- 12 percent versus 14 percent last quarter. But the report also identified a new batch of leaders in house price growth: Arizona, where the average home soared a stunning 30 percent in resale value between the third quarter of 2004 and the same period this year, and Florida, which now accounts for 11 of the top 20 fastest-appreciating metropolitan real estate markets in the U.S.

Arizona and Florida replace California and Nevada, which had dominated OFHEO's hot-spot list for much of 2004-2005. Now California has just one market in the top ten, and that is relatively tiny Merced. Phoenix-Scottsdale was the fastest-appreciating major urban area over the past year, with average price gains per existing house of 34.4 percent. Prescott, Arizona saw average gains of 28.3 percent and Tucson gained an average 24 percent.

Florida markets sizzled at record-breaking rates, higher than any time in the past three decades: Cape Coral (33.2 percent), Naples (32.3 percent), Sarasota (30.4 percent), Orlando (28 percent) and West Palm Beach and Fort Lauderdale (26.7 percent).

The slowest-appreciating markets in the U.S. last year, according to OFHEO, were in the Rust Belt and parts of the Rocky Mountain region. Mansfield, Ohio, for instance, came in dead last among 260 markets with a 0.76 percent annual appreciation rate. Greeley, Colorado, was next slowest with average value gains of 0.7 percent in the third quarter but a net 2.2 percent gain for the full year. Denver saw just a 4.1 percent gain during the 12 month period covered by the study.

Texas markets continued to show generally modest growth rates -- Fort Worth gained an average 3.8 percent, Dallas 4.2 percent and Houston 4.6 percent.

Among the previously-sizzling markets now showing pronounced slowdowns are metropolitan Boston, which registered a 7.2 percent annual appreciation rate -- down from double digits throughout much of 2001-2004 -- and San Diego, which saw appreciation in excess of 24 percent last year. San Diego's third quarter rate of gain -- 1.7 percent or 6.8 percent annualized -- portends more significant cooling ahead. Boston's annualized quarterly rate was even lower -- 3.6 percent.

The new OFHEO numbers support the view of National Association of Realtors chief economist David Lereah that the real estate market is headed for a "return to more balance" -- especially in the once-superheated markets of the West Coast and New England. The appreciation action instead has now shifted south -- to the desert and to Florida -- in part because of net population inflows to those areas plus transfers of investment dollars out of the cooling markets.

A front -- page New York Times article last week, for instance, described a Long Island homeowner who sold his house for $550,000 and bought a larger home in St. Augustine, Florida, free and clear of mortgage debt for half of his tax-free gains. The seller said he knows of "dozens" of others from his area who were making similar moves.

But once prices inflate in Florida and Arizona to noneconomic levels -- out of line with what's affordable by in-migrants and local households -- those markets too will inevitably correct and begin to cool off.

After that, where are the next potential hot spots? Look to areas where prices are relatively moderate by national standards, and where appreciation rates have been steadily moving up after long periods of low annual gains. The new OFHEO data suggest a possible future contender: Utah, which had a 15 percent rate of gain this past year, after being among the slowest-growth states for years.