In late 2002, the Office of Federal Housing Enterprise Oversight reported that home prices were up 6.2 percent, year over year, while the National Association of Realtors put the 12-month increase at 9.8 percent, the fastest pace since 1987. (The two groups use different methods of tracking home prices.)
In the past seven years, home prices have outpaced inflation by about 31 percentage points, an unprecedented divergence. In some areas on the East and West Coasts, the divergence has been 100 percentage points. The largest run-up has been in high-end houses, in many areas, so this is where any correction likely will be the greatest.
Thus, housing prices could fall if there is a spike in interest rates. Besides rising interest rates, falling apartment rents might be another indicator that housing prices are shaky. If a local rental market weakens, producing high vacancies, this would eventually exert downward pressure on home prices. As tenants are able to get better deals on rent, they will be less anxious to rush out to buy homes. Less demand, in turn, will cause house prices to fall.
