What's Next for Home Prices Even with real estate values sky-high and rates on the rise, the outlook is for more gains this year
By Adrienne Carter With Sarah Cooper, Judy Feldman and Erica Garcia

(MONEY Magazine) – When it comes to real estate, there's one topic on everybody's mind these days: interest rates. Real estate has been unstoppable in recent years, thanks in no small part to ultracheap mortgages. But with the economy hitting its stride, rates have been creeping up. The 30-year fixed-rate mortgage hit 5.9% in mid-April, up from a June 2003 low of 5.4%. Could home prices take a hit as rates head even higher?

Rates will undoubtedly play a role in the real estate market this year. For one thing, higher rates make housing less affordable. At a 5.5% interest rate, a $1,500 monthly payment buys a $264,500 loan; at 6%, just a $250,500 one. But this rising-rate environment is more likely to temper growth than curtail it altogether, according to Case Shiller Weiss, the nation's premier housing researcher. The group predicts that average home prices across the nation will grow 6.4% over the next year, down modestly from the 8% pickup in 2003.

So what's keeping prices strong? Dave Seiders, chief economist for the National Association of Home Builders, says the recovery in the job market and higher personal income will help offset the negative impact of higher interest rates. And even at 6% to 7%, mortgage rates would remain historically low.

Of course, real estate is highly localized. What's happening nationwide isn't necessarily an indication of what's going on in your neighborhood. That's why we've compiled data on 100 of the largest metropolitan areas. In the tables that follow, you can check out home-price appreciation and forecasts in your neck of the woods or on the other side of the Mississippi. This year we've also included the ratio between the median home price and median family income in each market. A high figure may indicate that home prices are growing at a frenetic pace relative to incomes, a sign that prices could be overinflated. High volatility--that is, big price swings from one year to the next--is also an indication of a potentially risky market.


Asking price $325,000 Selling price $326,000 4% annualized gains since 1998

Bubble? What bubble? With local prices up just 5.8% in 2003 and forecasted to rise 6.4% next year, folks in northern Ohio aren't worried. Here, houses stay on the market for up to 30 days, sell for the asking price and attract just a few bids. Good home values is why Chris and Liz Owen--who spent 10 years abroad--picked their hometown when they moved back to the States last year. One priority: a new kitchen. Most area homes are 70 to 80 years old, so modern touches are highly prized. With good schools within walking distance and museums and theaters nearby, the four-bedroom colonial in suburban Shaker Heights was a perfect fit.

Los Angeles

Asking price $650,000 Selling price $675,000 65% profit in 14 months

Los Angeles is a boomtown. Home prices are up an astronomical 87% since 1998--and are expected to jump another 13% next year. The bottom line: Virtually everything sells. Even a dilapidated two-bedroom in an outlying neighborhood attracts multiple bids. In 2003, Anna Alvarado paid $350,000 for this three-bedroom, one-bath fixer-upper in Culver City, putting $60,000 into renovations. When she decided to sell 14 months later, her house sold in 20 days, for a net gain of $265,000. One reason for the high price was the "granny flat," a detached guesthouse that could bring in $1,000 or so a month in rent.


Asking price $246,500 Selling price $260,000 Sold in 3 days

Like their Red Sox, Boston home buyers have it tough. With single-family home prices up 79% since 1998, first-time buyers and empty-nesters are scrambling. Demand has developers converting schools, churches, even a prison, into housing. Basil Cleveland and Sarah Whitesel bid $13,500 over the asking price on a 424-square-foot one-bedroom in this 1888 Cambridge building. Smart--there were four other offers. "We had no time to think about it," says Cleveland. "It's small, but a place in Harvard Square is a great find."


Asking price $146,000 Selling price $146,000 77,555 building permits issued since 2001

With land to spare, Dallas is a hotbed of construction; more than eight times as many building permits for single-family homes were issued in Dallas between 2001 and 2003 as in New York City. That robust supply should help keep home-price growth (just 2.1% last year) modest going forward. Chad Gray and Meghan Warhurst looked at older homes but instead chose a new two-bedroom, two-bath model in suburban Aubrey that they could customize. They were able to pick out their own flooring, countertops and interior paint colors. Landscaping was finished just a week before they were scheduled to close.


Asking price $1.7 million Selling price $1.7 million 8.7% forecast growth

Red-hot Miami is a high-density hood. The population per square mile is 1,230, among the highest in the U.S. That means high-rise condos popping up downtown, and crowded suburbs where residents must often choose between a pool and a yard. This six-bedroom, five-bath house in the ritzy neighborhood of Pinecrest is that rare jewel with both a pool and an acre of land. And because the sellers were in the middle of renovations, the new owners got the house at a big discount to comparable--but finished--properties.