USA Housing and China Affects US Interest Rates

U.S. HOUSE PRICES CONTINUE TO RISE RAPIDLY

WASHINGTON, D.C. � Average U.S. home prices increased 12.50 percent from the first quarter of 2004 through the first quarter of 2005. Appreciation for the most recent quarter was 2.21 percent, or an annualized rate of 8.82 percent. The new data represent the largest four quarter increase since the third quarter of 2004, when appreciation surpassed any increase in over 25 years. The figures were released today by OFHEO Acting Director Stephen A.Blumenthal, as part of the House Price Index (HPI), a quarterly report analyzing housing price appreciation trends.

"The House Price Index shows the rise in house prices continues at an extremely strong pace and raises the potential for declines in some areas later on," said OFHEO Chief Economist Patrick Lawler.

House prices grew considerably faster over the past year than did prices of non-housing goods and services reflected in the Consumer Price Index. House prices rose 12.5 percent, while prices of other goods and services rose only 3.1 percent.

The biggest price increases in the HPI during the past year occurred in Nevada, with a 4 - quarter increase of 31.2 percent. With the latest annual data, California overtook Hawaii to become the state with the second fastest growing house price appreciation. The smallest increases occurred in Colorado, Ohio, Oklahoma, Indiana and Texas.

Other significant findings in the HPI:

1. Arizona�s annual house price appreciation has accelerated significantly in the last year, rising 19.4 percent compared to 7.7 in the preceding year.

2. Utah is showing increasing price momentum. In the latest period, the annual appreciation rate for Utah grew to 6.3 percent and the state now ranks 35th compared to the fourth quarter of 2003 when it ranked last among all states.

3. The list of the 20 fastest appreciating MSAs remained largely unchanged from the previous quarter, with 14 of the 20 fastest growing MSAs in California, 4 in Florida, and 2 in Nevada.

4. As in the previous quarter, the top three Census Divisions were the Pacific, South Atlantic and Mid-Atlantic Divisions.

5. Despite mildly accelerating appreciation, the New England Division fell from 4th to 5th place in terms of its annual appreciation rates.

6. The Mountain Division has seen a steady increase in its growth rate. In the first quarter of 2005, it had the fourth highest 4-quarter appreciation (12.96 percent), a substantial acceleration since its 3.6 percent increase in the third quarter of 200

U.S. Housing Boom is near the End

Home Prices Slowing
Home price boost are moderating all over the U.S., according to the Office of Housing Enterprise Oversight. While prices averaged a 7.71 percent increase from the first quarter of 2003 through the first quarter of 2004, the 0.96 percent first-quarter rise is "nearly 3 percentage points lower than the 3.71 percent jump in the fourth quarter of 2003," OFHEO said. Mortgage applications also fell for the fifth straight week in the week ending June 4, down 8.9 percent, according to the Mortgage Bankers Association, a trade group.

Does the Bubble is ending?
There have been regional declines in Boston, California and Houston over the past two decades; is it possible that for most homeowners, real estate is the best long-term purchase? Going back to 1980, in the frothiest markets, prices appreciated most in Massachusetts (up 516 percent), New York (399 percent), Rhode Island (361 percent), and California (315 percent) through March 31, OFHEO reported. You could have done better. Let's say you took a buy-and-hold approach with stocks represented by the Standard & Poor's 500 index of the largest U.S. companies over the same period. With dividends reinvested, your nominal return would have been 1,317 percent, or about 11 percent a year. Although it's unfair to compare large - company stocks to homes - stocks annually average 20 percent variance in prices (standard deviation since 1926 or risk) -- there's typically no 6 percent commission to buy a no-load stock index, no taxes to pay (if held in a tax-deferred account) and certainly no maintenance costs. If owned through a mutual fund, you could pay about 0.20 percent a year to own the stock index.

The Real Estate Risk
Real estate is not a risk free. Like tech stocks in 1998-2000, homes can also be wildly overvalued. A recent study by the Economist magazine of the $50 trillion worldwide property market found that "home prices look seriously overvalued in Australia, Ireland, Netherlands, Spain, the U.K. and U.S." Pam Woodall, economics editor of the British magazine, said at a London conference sponsored by the U.K. research firm Investment Property Databank that ``house prices will fall by at least 20 percent in many economies over the next four years.'' While it's hotly debated whether a dramatic decline is coming for the most inflated markets, the least-discussed risk is that being overleveraged in real estate can negatively crimp your cash flow and financial goals.

The Risk Factor is Increasing
The commonly accepted wisdom that you should buy as much house as you can afford is perhaps the most dangerous residential risk factor. Higher housing debt can push you down. "Americans are spending about a third of their disposable income on housing, twice what they were spending 30 years ago". That means a reduction in cash flow and a sixth less money available to finance retirement and other financial goals. Spurred by low consumer interest rates, the crushing burden of household debt also contributed to 1.6 million personal bankruptcy filings for the year ended March 31. So no real-estate investment is worthwhile if it cripples your cash flow. "One-sixth less disposable income for a family earning $120,000 a year would leave them with $20,000 less in real dollars per year"

Should Homebuyers Worry?
It's a good time to be alert and selling real estate now may be a good idea if you need to take a gain. You can observe renting if moving into a pricey new area. Just don't expect any bargains when buying in torrid markets. In Manhattan, where demand is strong, apartment prices climbed to a record average $998,905 in the first quarter of this year from $903,259 the previous three months. Therefore if you think there's a bubble you should consider selling your property. When the prices will start going down, we can see a massive of selling that will contribute to even larger losses.

China affects US interest rates

Most experts think that China is unwillingness to allow its currency (the Yuan) to appreciate against the US$ is the key factor behind the low interest rate structure in the US.

The Chinese currency was hooked to the US$ at 8.276 Yuan. Given China�s growing trade surplus with the US, the Yuan will have to appreciate more than the last appreciation and this in turn will push the US interest rate structure higher.

Chinese authorities are buying all the US dollars earned through exports and capital inflows and investing them in US Treasury securities to prevent upward pressure on the Yuan. As a result, on account of relatively low yields on Treasuries the mortgage rate is much lower than it would have been if not for Chinese buying, or so it held. For example, in April the rate on the 30-year conventional mortgage stood at 5.86 per cent against 5.93 per cent in March. As a result of the relatively low level of the mortgage rate the housing market and general economic activity remain buoyant.

Now That China start to cut its support for the US$ and let the Yuan appreciate this start pushing the US interests rate up. This in turn can rush the US housing bubble and push the economy into recession.

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