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Investment Analysis

The US Housing Market: An exception


Jan 06, 2008

While the rest of the developed world is experiencing slowdown in house prices, the US housing market is till moving forward. Based on the latest data from the Office of Federal Housing Enterprise Oversight (OFHEO), average house prices grew by 13.4% from the 2nd quarter of 2004 to the 2ndquarter of 2005. this is the largest annual price increase in 25 years. It is significantly higher than the 8.4% average growth for the past five years.

Eight states registered house price growth of more than 20%, headed by Nevada with 28.13% growth p.a., followed by Arizona, Hawaii, California, Florida, DC, Maryland and Virginia. All states registered positive growth rates with Texas’ still impressive 4.68% at the bottom.

Aside from the global trend of slowdown, the growth is surprising because of the hikes in the interest rate by the Fed during the year. For the 11th consecutive month, key interest rate was raised to 3.75%. Last May 2004, the Fed Funds rate is just at 1.0% and analysts expect it to reach 4% to 4.5%. According to a statement, the Fed would move steadily to counter soaring housing coast and the high price of crude oil and petrol.

The boom continues because of the set-up of the US mortgage system. Most of the mortgage loans, 82%, are fixed-rate. However, because of the huge secondary mortgage market households are able to refinance their loans when interest rates fall. Refinancing is the process of changing the terms of your loan to take advantage of lower interest rates or better investment deals. Competition among banks led to efficiency and relatively cheap refinancing costs. This effectively insulates most households from rising interest rates while allowing them to take advantage of falling interest rates.

Despite the increases in the short-term interest rates, long-term rates are still low. Long-terms rates determine the mortgage rate. The stubbornness of long term rates is due to the continued strong demand for long term bonds from foreigners, especially Chinese investors.

After Katrina destroyed houses in Southern US, analysts say that the rebuilding process, financed by dole-outs from the government, might boost the housing market further.


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