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Worries Persist About Direction of US Home Prices

The global credit squeeze now underway, in which lenders tighten standards and thus squeeze the flow of new loans, is heightening concerns about U.S. home prices. VOA's Barry Wood has more about a housing boom that turned to bust.

With mortgage interest rates at historic lows, in many parts of the country prices of single-family homes doubled in the early part of this decade. But the boom is now over and prices in many places have turned down.

Nationwide, US home prices are one and a half percent lower than a year ago. Regional differences are significant with prices still rising in Seattle, the San Francisco Bay area and Charlotte, North Carolina. But prices in the Midwest rust belt cities of Detroit and Cleveland are down seven percent. Prices are also down in Phoenix, Las Vegas and most parts of Florida.

Stephen Frater, a New York Times reporter covering real estate in southwest Florida, says until 2006 home prices in the Sarasota, Bradenton area were rising 25 to 30 percent per year. "In a four to five year time frame prices doubled. And we've given back how much of that, I would say more than 10 percent, probably closer to 20 per cent," he said.

Stuart Hoffman, chief economist at PNC Bank in Pittsburgh, believes the credit squeeze is putting additional downward pressure on home prices. "And I think the decline in the housing market has a good bit further to go," he said.

As elsewhere, most Americans buy their homes with long-term mortgage loans. A high 70 percent of all American families own the homes in which they live. The fixed rate 30-year mortgage has become less of an industry standard as many home-buyers pay off their loans in 15 years or take adjustable rate mortgages, which at the beginning are often cheaper.

The credit squeeze occurred in large part because of trouble in sub-prime mortgages. These higher interest rate loans are offered to borrowers with poor credit histories. Until recently, many sub-prime loans had teaser rates where interest was waived or very low for the first few years. Many of these borrowers are now behind in their payments and repossessions are way up. An estimated two million borrowers in the next few months will have their interest rates reset to higher market levels.

Richard Berner, chief economist at Morgan Stanley in New York, says the credit squeeze is likely to make it harder for home buyers to get loans. "It's going to be an environment in which investors are going to be a lot more cautious. Credit officers will be a lot more cautious," he said.

Since a home is the principal asset of most Americans, if price declines take hold there is bound to a political impact. Most experts say the central bank will cut interest rates if the housing market remains weak.