Housing starts dropped 7.8 percent in March, causing some analysts to suggest that this engine of growth was on its last miles. Baloney. Starts did decline in March but after two strong monthly gains that saw a 1.785 million-unit rate in February, the highest level for housing starts since December 1998. Economists have been predicting a slowdown in housing construction for nearly two years. But spurred by low mortgage rates, housing barely paused during the recession.

In his testimony before the Joint Economic Committee last week, Federal Reserve Chairman Alan Greenspan noted that discussion of a real estate bubble is premature, particularly since real estate is local rather than national in scope. Some regional markets might be red hot while others may be seeing soft housing appreciation and demand.

Real estate is indeed very local. If it were practical, we'd show you data on metropolitan areas. But the quantity of data needed would be daunting to say the least. However, we will show how housing starts have grown and home prices have appreciated in the fifty states. Some of information is quite surprising.

Housing Starts Growth
In 2001, housing starts surged as much as 36.7 percent (Alaska) and plunged as much as 17.7 percent (New Jersey). Thirty-one states did post increases last year, while the remaining 19 declined. The table below shows the state-by-state comparison in housing activity. The first column (from the left) shows the growth rate for 2001 while the second column is the annual average rate of growth for the most recent five years. It is interesting to note that the pattern of growth is not uniform by region. For instance, the three states with the largest declines (New Jersey, Mississippi, and Nebraska) are in the Northeast, the South, and the Midwest regions of the country. Two of the three states with the fastest growth are in the West (Alaska, Wyoming) with the third (Arkansas) in the South.

One-year growth rates can be misleading at times because a state's rate of change might be exaggerated by an unusually sharp change in the previous year. Consequently, we decided to look at the change in housing starts between 1996 and 2001. The second column in the table below shows the 5-year change. Aside from Nebraska, the bottom and top three states over the one-year change don't match up at all for the five-year change. Oregon, Nebraska and Utah show the largest declines in housing starts between 1996 and 2001. Sixteen states posted declines over the same period. The three states with the largest five-year gain were California, Colorado and Florida. Perhaps this isn't surprising given the rapid growth in the high tech industry over the period, especially concentrated in California.

Home Price Appreciation
Prices rose more rapidly than inflation in all fifty states in 2001. The most rapid price appreciation came in Florida, Rhode Island and Massachusetts. The slowest housing appreciation was in Utah, Nebraska, and Alaska. Given the strong one-year spurt in Alaskan housing starts, one might be surprised with the relatively small appreciation. Actually, housing prices increased twice as rapidly as the previous year. Thus, relatively speaking, price appreciation did come with a growing housing market. The rapid appreciation in prices in Rhode Island might also be considered unusual in light of the fact that home construction dropped sharply in 2001. Yet, Rhode Island is a small state with a mature market, where the limited supply of land opens the door for price hikes when demand increases.

Just like the 1-year and 5-year change in housing starts showed a different picture when viewed state by state, so do 1-year and 5-year appreciation levels. For instance, Massachusetts, California, and New Hampshire show the fastest appreciation over the past three years. At least for Massachusetts and California, this could be reflecting growth in the high tech industry. In terms of the slowest appreciation, not surprisingly, this came from the states with relatively low population levels.

Real estate investments
We showed the relative growth rates of housing starts and home appreciation for the fifty states to underscore the differences in the housing market across the nation. The fact is these numbers might be somewhat misleading as well. For instance, large urban areas are likely to see greater home price appreciation than small towns or rural areas. Real estate bargains can be found even in large metropolitan areas for those people willing to invest in "fixer-uppers" or in not-so-posh neighborhoods undergoing positive transformation.

Recent scuttlebutt in the financial media is that a real estate bubble may be developing because housing prices have appreciated sharply over the past few years. It is not prudent to compare real estate investments in the same way as stock investments. Risk factors differ - particularly if one is considering a single-family home or a multi-family home with potential cash flow.

Only a thorough analysis of your local market will help you determine whether real estate is over-priced or not.

Evelina M. Tainer, Chief Economist, Econoday