Fed finds U.S. households are getting richer

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Soaring home values and rising stock prices drove the wealth of American households up 9 percent to a record high $49 trillion at the end of last year, the Federal Reserve reported yesterday.

But the added wealth from a $2 trillion gain in house prices didn't come without a hitch. Mortgage debt also rose a stunning 13 percent to $7.5 trillion as home purchasers stretched their incomes to buy high-priced houses and homeowners tapped into their growing wealth via home-equity loans.

While for most of the country the value of houses has doubled since 1996, in the Washington area the appreciation has been more rapid. House prices here have doubled in four years, providing homeowners with a big windfall of wealth, but also sharply higher property tax bills.

"The Washington, D.C., metropolitan housing market is revered and reviled for its volatile upward momentum," said Maureen Dunn, general manager of McEnearney Associates, a local real estate firm that is predicting another 10 percent to 20 percent increase in prices on average here this year.

Rising prices in Washington are fueled by the combination of robust demand and a limited supply of houses, she said. Last year, Washington home prices surged by nearly 25 percent, more than twice the national rate.

The rapid gains in the housing market prompted Federal Reserve Chairman Alan Greenspan last month to testify that an unsustainable bubble may be developing in some areas, although no problem exists nationwide. He said a reversal of some of the wealth gains documented by the Fed may come in the years ahead.

Several leading economists have identified Washington as one area where prices may be overstretched, along with other high-priced areas on the East and West coasts.

"There has been a great deal of discussion about cities that are expecting the 'housing bubble' to burst," Ms. Dunn said. But she predicted that won't happen in Washington because the growth in housing prices has been accompanied by rising jobs and incomes so people can afford the increase.

Explosive growth in federal spending on defense, homeland security and other areas gave Washington the strongest regional economy in the nation for years following the 2001 recession when the rest of the nation's economy was mostly stagnant.

However, federal spending growth is expected to slow this year as Congress and the Bush administration move to reduce the budget deficit.

While household incomes have grown solidly in Washington in recent years, a study by the Fannie Mae Foundation and Urban Institute found that housing prices have increased much more rapidly -- as much as four times faster in some years.

"The median-income family can no longer afford a median-priced home," it concluded, even though "lower interest rates in recent years increased the purchasing power of households, offsetting some of the effects of rising prices."

Historically low 30-year mortgage rates averaging under 6 percent are expected to rise this year, with Ms. Dunn predicting an increase of nearly a full percentage point.

Rates for a 30-year mortgage climbed to a seven-month high of 5.85 percent last week, according to Freddie Mac.

Roger Kubarych, economist with HVB Group, said the rise in interest rates will clip the wings of the housing boom and lead to price declines in overheated markets.

He noted that while the value of American homes rose from $15 trillion to $17 trillion last year, the share of equity in those homes stayed at 56 percent because of the massive increase in mortgage debt.

"The whole game is people are borrowing more and more, increasing the demand for housing and pushing up the price," Mr. Kubarych said. Many buyers today are getting 100 percent loans and have zero equity in their homes.

"I worry that if prices go down a little bit, they'll be underwater and will default on their mortgages," he said.

"People are taking a huge risk, even borrowing money on their credit cards to pay the carrying cost on a mortgage," he said. "How can anybody not talk about a housing bubble when things like this are going on all over the place?"