Housing Prices
Nationally, housing prices increased less in 2006 than in 2005. An inflationadjusted version of the housing price index (the nominal version of which is compiled by the Office of Federal Housing Enterprise Oversight from new home sales and appraisals during refinancing) increased at an average annual rate of 6.4 percent from 2000 to 2005, and then slowed to a 2.6 percent annual rate of increase in the first three quarters of 2006. (These inflationadjusted prices are deflated by the consumer price index.) Looking back, the cumulative increase in inflation-adjusted housing prices during the 6 years from 1999 to 2005 is one of the largest on record, exceeded only by the period immediately following the Second World War. Since 1929, periods of rising real prices have been linked to increases in the share of the gross national product allocated to home construction. The 6.4 percent annual rate of increase in the relative price of housing from 2000 to 2005 was associated with an increase in the residential construction share of GDP from 4.6 percent to 6.2 percent.
Although relative housing prices (that is relative to the consumer price index (CPI)) increased in almost all metropolitan areas during the 5 years from 2000 to 2005, the increases were concentrated in a few high-profile markets; increases in most areas were only modest. For example, real prices in Los Angeles increased at a 14.3 percent annual rate, but real price increases in 71 percent of metropolitan areas were less than the 6.4 percent national average. Most house price changes reflect local conditions (such as local economic and population growth, tastes, and geographic and zoning limitations on construction). In areas with restricted supply, small changes in demand may translate into large price changes.
Although house-price increases during these 5 years were concentrated in a few markets, the decline in mortgage rates from 2000 to 2005 was one common factor that may have helped raise home prices across the nation. Because of the drop in mortgage rates, prices could increase 4.4 percent per year during this period without raising the monthly mortgage payment.