WASHINGTON -- U.S sales of previously owned homes surged unexpectedly in August, and prices reached a record high, defying predictions that the housing market was peaking.
Existing home sales rose 2 per cent to a 7.29 million annual pace last month, the second-highest on record, the National Association of Realtors said yesterday. The median price rose 15.8 per cent to a record $220,000 (U.S.) and the supply of homes for sale increased.
"These are tremendous numbers," said Kevin Harris, chief economist at Informa Global Markets in New York. "There is nothing solid in the latest round of existing home sales data to show that we're slowing down."
The housing market has been the main driver of the U.S. economy this decade, accounting for 50 per cent of overall growth and more than half of private payroll jobs created since 2001, Merrill Lynch said in an August report. Price appreciation helped add $5.2-trillion to Americans' balance sheets during the current expansion, or 68 per cent of all wealth creation, the U.S. Federal Reserve Board said.
More World Stories
The increase in median home prices in August was the strongest rate of appreciation since July, 1979.
Though mortgage debt is rising, most Americans have built up so much equity in their homes that they could weather a price drop without serious harm. Fed chairman Alan Greenspan said.
"The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," Mr. Greenspan told the American Bankers Association. The Fed chief's remarks on housing prices were more reassuring than a month ago, when Mr. Greenspan told a Fed seminar the housing boom will "inevitably" cool and that there might be declines. But yesterday, he said some parts of the country may be seeing unsustainably large price gains.
"In the United States, signs of froth have clearly emerged in some local markets where home prices seem to have risen to unsustainable levels," Mr. Greenspan said.
"It is still too early to judge whether the froth will become evident on a widening geographic scale, or whether recent indications of some easing of speculative pressures signal the onset of a moderating trend," he added.
Analysts noted that, if home prices did start dropping, it might rattle homeowners' confidence enough to make them rein in their free-spending ways.
"Given all the leverage that the household sector has built up, their confidence in rising home equity has been an important part of their willingness to take on all that [mortgage] debt," said economist Avery Shenfeld of CIBC World Markets in Toronto.
Some housing-market froth may be spilling over into markets in the form of new types of mortgages that make it easier for home buyers to qualify for big loans.
"The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny," Mr. Greenspan said.
Judging by the acceleration in buying and selling second homes, it seems that speculation is playing a larger role in recent home-price rises than in the past, he said.
Mr. Greenspan cited a study he co-authored with Fed staffer Jim Kennedy and was published separately on the Fed's website that found about four-fifths of the rise in mortgage debt resulted from people extracting their home equity.
It was the first such study that Mr. Greenspan has published under his own name since October, 1996.
Drawing from it, the Fed chief said stronger personal spending over the past decade may have been largely influenced by rises in home equity rather than income, thus accounting for much of the decline in personal savings rates since 1995.
53