Home prices return to record highs

House on sheet of bills

After slumping throughout the winter, home prices across much of the country have bounced back to last year's record highs. The median sales price for an existing single-family home -- the price where half the homes sold for more and half the homes sold for less -- rose to $227,500 in April, May and June.

That was just $100 less than the all-time high median price reached last summer and considerably more than the $217,900 median price during the first three months of the year, according to the most recent data from the National Association of Realtors.

The association now expects median prices to increase about 2.8% in 2006 and 2.2% in 2007.

While that's certainly not the breakneck pace of the past few years, it shows homeowners are hanging onto the record increases they enjoyed in the early 2000s -- and even adding to it.

When we took a closer look at the Realtor's data, we found the median sales price rose in 130 of 147 metropolitan areas, or 88% from the first three months to the second three months of the year.

That is in stark contrast to the past two surveys when: 

"The housing market appears to be slowing in an orderly way," Robert Dederick, a principal in RGD Economics and and former under secretary at the Department of Commerce told us. "So far, so good."

We agree.

The 17 cities reporting declines through the first six months of the year are scattered across the country from Florida to California.

Some, like the Miami and Fort Lauderdale area, were down after an exceptional run-up in prices. The median selling price in South Florida went from $231,600 in 2003 to $391,200 by the end of 2005. Although that fell to $376,200, this spring prices were still 2% higher than a year ago.

In most of the other cities, such as Youngstown, Ohio, and Syracuse, N.Y., it appeared local economic problems hurt home prices.

But these cities were clearly the exception.The Chicago area provides a good example of what's happened in the great majority of cities. Prices had peaked at $274,700 last July, August and September. They fell to $263,600 the first three months of the year but returned to $278,500 the second three months of the year, a new record.

Only 26 metro areas reported lower prices than in the spring and early summer of 2005. Prices in 17 of those cities were down less than 5%, and out of those 17, 13 were down 2% or less.

Even more remarkable is that home prices rose even though mortgage rates were at a four-year high, peaking at 6.93% for a 30-year-fixed loan the last week of June.

You just have to marvel at how resilient home prices have become.

What does this mean for homeowners.

First, you breathe a little easier if a big chunk of your net worth is tied up in your home. It remains a sound investment. It's also an important sign if you're selling your house.

Realtor data show there are a lot of unsold houses on the market right now -- 3.7 million in July, which is 39% more than a year ago.

But this will still be the third-best year for home sales and you should be able to get as much as the neighbor who sold last summer when sales and prices were setting new records.

It will just take a little longer to find a buyer.

If you're buying a house, the survey suggests that homes are back to fetching top dollar. If the market tilted slightly toward buyers this winter, it has evened out and may be tilting slightly back towards sellers this summer.

But you can still use the growing supply of unsold homes to your advantage. Don't set your sights on one home. Find several you like and be willing to move on if the first owner you approach won't accept your offer.

The other good news is that mortgage rates have fallen more than a third of a point since peaking in late June. When you look back at how much mortgages cost over the past 10 or 20 years, rates are quite reasonable and we think they'll drop a little more the next few weeks.

The key is to know exactly what's happening with prices in the community where you are buying. Find out what comparable houses sold for last summer and this spring, then bargain accordingly.

A house should still be part of your plan to build long-term wealth with a healthy mix of investments. The data show why.

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