But analysts wonder how much higher prices can go.

01:00 AM EDT on Friday, September 2, 2005

BY LYNN ARDITI
Journal Staff Writer

Rhode Island ranked 10th in the nation and led New England in house price appreciation during April, May and June, a government index released yesterday shows.

Rhode Island's single-family house prices during the second quarter spiked nearly 17 percent from a year earlier, compared with the national average increase of 13 percent, the Office of Federal Housing Enterprise Oversight reported.

"It is clearly a good thing if you own a home, because you're wealthier now; the value of your assets has gone up," said David W. Berson, chief economist for the Fannie Mae, a mortgage buying agency in Washington. "It's clearly not a good thing if you don't own a home and want to buy."

The median price of a single-family house in Rhode Island during the second quarter was $285,000, according to sales price data from the Rhode Island Association of Realtors. In Massachusetts, the median price was $375,000.

The federal index ranked Massachusetts 22nd nationally for house price appreciation, at just under 12 percent; Connecticut ranked 16th, at 13.6 percent.

The index is based on conventional mortgages of up to $359,650 that were bought by Fannie Mae and Freddie Mac, the biggest buyers of mortgage loans from lenders. The index does not include condominiums or multifamily houses.

Historically low interest rates have made it more affordable in recent years for Americans to buy houses, driving home-ownership rates nationally to nearly 70 percent.

Now, as interest rates have begun to approach 6 percent, economists say, the question becomes: How much longer can middle-income Americans afford to buy?

Rhode Island's single-family house prices have been rising at double-digit rates for five years, far outpacing the growth in income.

For example, the annual median household income in 2003 in Rhode Island rose 5.4 percent, compared with a nearly 15-percent increase in single-family house prices.

Rising house prices have prompted buyers to take on bigger mortgages with adjustable rates or years of interest-only payments which, economists and federal regulators say, could leave these homeowners financially vulnerable if the economy softens and prices decline.

"If you were to ask people who are buying at these high prices, they must be expecting prices to continue to rise . . . And that is probably irrational," said Alan Clayton-Matthews, a director of the nonprofit New England Economic Partnership and a professor at the University of Massachusetts, Boston.

"The longer that prices appreciate at this rapid rate," said Clayton-Matthews, "the more certain there will be a turnaround in the market."

The mentality of middle-class Americans has changed dramatically from a generation ago, with easier access to credit and an array of what people in the industry refer to as creative financing.

Marc A. Greenfield, a Providence real-estate attorney, said that most of his clients now are taking out 30-year mortgages, often with a provision that allows them to pay interest only for five or 10 years.

"Fifteen-year mortgages?" he said."Almost nobody wants to do them anymore."

Or nobody can afford them. Claude Chamalian and Tania Rocha recently bought their first house in East Providence. He is a landscape designer; she is a teacher's aide.

They bought a Queen Ann Victorian with 3 bedrooms, 1 1/2 baths and a backyard. The couple hope to someday start a family.

They paid $249,000. The couple took out a 30-year mortgage at a fixed rate of 6.2 percent.

They financed 100 percent of the price.

"My chunk of money wouldn't have made a dent, the prices are so high, so why spend the money?" said Chamalian, 38. "If I did a 5-percent down or a 10-percent down, the savings on my mortgage would be peanuts."

The 100-percent financing approach can be risky, said economist Clayton-Matthews, if house prices fall.

"If they have to sell, they may have to sell at a loss," Clayton-Matthews said, "and they could owe the bank money."

To gauge how far out of whack house prices are with income, Clayton-Matthews has developed an index that charts the ratio between the two over time. The housing affordability index he created for the New England Economic Parnership divides average house values (what homeowners told census takers their houses are worth) with per capita income.

In Rhode Island, house values last year, on average, were 6.9 times per capita income -- ahead of Massachusetts and the national average. That's roughly the same ratio as during the last housing boom, in 1989. In the years that followed, house prices plummeted.

Clayton-Matthews remembers that time well. He bought his first home, a condo, during the 1989 boom -- and sold it, seven years later, for "tens of thousands of dollars less than what we paid for it."

It could have been worse, he said. He and his wife had enough equity in the house so they could walk away from the sale with "a couple hundred bucks."

Lynn Arditi, a Journal staff writer, can be reached by e-mail at larditi [at] projo.com