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Long-Term Outlook for Home Prices Looks Favorable

Telltale signs of an imminent bust in the nation’s housing prices are nowhere in evidence, Michael Fratantoni, director of economic and policy research in Fannie Mae’s Regulatory Policy Division, told the NAHB Construction Forecast Conference in Washington, D.C. last week.

But that’s not surprising, considering that prices have never declined nationally over the past 30 years, and the Great Depression of the 1930s is probably the only time in the last century when they may have, according to Fratantoni.

He suggested that people who are worried about possible bubbles in their local housing markets take a look at the oil patch states of Arkansas, Louisiana, Mississippi, Oklahoma and Texas during the mid- to late-1980s when oil prices were plunging and Hawaii a decade later when Japanese investors were pulling up stakes.

In both cases, declining housing prices were precipitated by a declining economy and significant layoffs and population losses. House prices dropped, he said, because “more people were selling than buying.”

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Fratantoni said that Fannie Mae is forecasting that at the national level prices on single-family homes will grow annually at a 5% pace between 2003 and 2013.

If unsold inventories of homes were rising across the country and prices were surging, then that might be something to be concerned about, he said.

But inventory levels “have been declining over a period of record gains in home prices,” he said, and there is “evidence of constrained supply” that is expected to persist.

In booming markets “you would expect a more robust supply response,” Fratantoni said. “Instead, the supply response is largely muted.” Restrictive land use policies are undoubtedly part of the problem, especially on the East and West Coasts.

And the rate of home price appreciation “is slowly ramping down,” he said.

Photo by Morris Semiatin
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