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Homeowners gain again
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June 2, 2000: 8:03 a.m. ET
New England shows biggest value increase, but some regions lag inflation
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - You were a lucky -- and richer -- homeowner if you lived in New England in the first quarter of 2000.
All across the United States, home values averaged good gains. For New England homeowners, though, the start of 2000 was particularly bountiful. Home values in that region "posted amazing growth," according to Freddie Mac. New Englanders averaged annualized gains of 10.2 percent for the first three months if they owned a house, according to a report released Thursday by the Washington, D.C.-based home-loan financing company.
Nationwide, homeowners saw their properties go up an average 5.1 percent, on an annualized basis. To get the annualized rate, Freddie Mac (FRE: Research, Estimates) takes the actual rate of growth for the first quarter and projects it out over four quarters.
But the pace of growth has slowed substantially since the fourth quarter of last year. In fact, in two parts of the country, homeowners lost ground to inflation during the first quarter -- even though the price of their homes went up.
Fed may be having impact
 "Five percent on its own would be good news," said Amy Cutts, senior economist with Freddie Mac and the supervisor of the Conventional Mortgage Home Price Index report. "That's a good rate of appreciation and reflects a strong housing market."
But the rate of growth is down almost two whole percentage points from the fourth quarter of 1999, when homes rose a rollicking 6.9 percent, again as an annualized average.
"That's a big slowing," Cutts said. "It's evidence that the Federal Reserve and Fed Chairman Alan Greenspan are being effective in their efforts to cool the economy."
Cutts said the rate of growth in home prices for the last two quarters of 1999 was probably excessive. "This is a slowing down to what I think of as good, sustainable levels," she said.
Losing value while the price goes up
The home price news is not good all across the country, however. In the two worst-performing U.S. regions, home prices rose in the first quarter at less than the rate of inflation.
The East South Central -- Alabama, Kentucky, Mississippi and Tennessee -- saw an average home-price increase of just 2.5 percent, annualized. It was at the bottom of the list of nine U.S. regions.
The West South Central -- Arkansas, Louisiana, Oklahoma and Texas -- was the next-to-worst region. Home prices went up 2.8 percent in the first quarter, on an average annualized basis.
With the core rate of inflation at 2.9 percent, that means homeowners in those regions lost actual "value" in their houses, even though the price of their homes went up.
"If they sold their house today, they would still get more money than they paid for it," Cutts explained. "But they won't be able to buy as many goods and services as they could before."
Home price increases not their old selves
In all other parts of the country, homeowners did gain actual "value" in their houses just by virtue of owning them. But they are not seeing the rapid rate of appreciation they saw in 1999.
That's because mortgage rates have been increasing, driven by increases in interest rates from the Federal Reserve. Though the cost of borrowing via a mortgage fell this week, rates are still well above their level a year ago.
New home sales took a 5.8 percent tumble in April, too, an unexpectedly large fall. Economists tended to welcome the cooling off in the housing market as a positive sign.
The rich aren't stupid
All of the economic and interest rate data are interlinked. Builders tend to concentrate at the high end of the market, appealing to the luxury home buyer that provides them with fat margins.
"The good money is going to be made where the money is," Cutts observed. After the rapid appreciation during 1999, many of the wealthiest homeowners already made their move into a new, big home. "A lot of the swapping-up has already happened," Cutts continued.
But when mortgage rates are rising, even the rich are less likely to buy a massive new home when it's more expensive to do so. On an interest rate increase of half a percentage point, a $100,000 mortgage gets more expensive by $33 per month, Cutts calculated.
When you work that out over a year -- or the 30-year life of some mortgages -- "that's a lot, and interest rates have gone up more than a percentage point in the last year," she said. And the monthly payments obviously go up even more on a house that requires you to borrow more than $100,000.
First-time buyers hurt the most
When homeowners at the high end of the market move up or into new houses, their old homes come on the market. Middle-of-the-range homeowners decide to upgrade. Eventually, that process trickles down to first-time home buyers.
"A lot of the starter homes are on the smaller end, a little bit older," Cutts said. It's those first-time and prospective home buyers who feel the pinch of higher interest rates and higher mortgages the most.
They tend to have the least flexibility in their budgets, and they are more likely to have to borrow a greater share of the purchase price of their first home.
"People who are making the transition from renters to owners will find it the biggest hurdle," Cutts said.
Owning a home still gives you good gains
Still, aside from the two regions where inflation is beating out home price increases, the rising value of property means buying a home is still a good investment.
"Again, 5.1 percent sounds small relative to what we saw last quarter and the quarter before that, but it's very strong historically," Cutts said. With consumer confidence still high and job growth good, "people will still keep investing in major purchases like housing."
Freddie Mac produces its home-price report by comparing actual sale or appraisal prices of homes with past sale or appraisal prices for the same home. It has more than 11.9 million records in its repeat-transactions database, according to a release.
The federal government formed Freddie Mac (FRE: Research, Estimates), or the Federal Home Loan Mortgage Corp., in 1970. The quasi-governmental agency is in fact a public company traded on the New York Stock Exchange.
Freddie Mac buys mortgages from banks, bundles them and sells them as mortgage-backed securities. One in six U.S. homeowners has a Freddie Mac-backed mortgage, according to the agency. 
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