June 6 (Bloomberg) -- Fannie Mae Chief Executive Franklin Raines, who runs the biggest mortgage portfolio in the world, said the continuing rise in housing prices won't end in a bust like the stock market of three years ago.

``We do not see any sign of housing price decline nationwide, let alone the bursting of a bubble,'' Raines said in an interview with Bloomberg News in New York.

Raines, 54, is confident even though he is skeptical about prospects for the nation's growth this year. The economy is ``too close to call,'' and the Federal Reserve may cut its target interest rate at its June 24-25 meeting, he said. Fannie Mae's economists recently withdrew predictions for an interest rate increase this year, Raines said.

Housing has been one of the few bright spots in the U.S. economy as unemployment rose to the highest level in almost nine years and the country struggled to recover from recession. The lowest interest rates in more than four decades boosted home sales and mortgage-loan refinancing to record levels, putting cash in consumers' pockets. Fannie Mae benefited as debt backed by home loans surged and home prices rose.

Home prices nationwide rose at an annual rate of 6.48 percent in the first quarter of 2003, the slowest pace in more than three years, according to the Office of Federal Housing Enterprise Oversight, Fannie Mae's regulator. Home price appreciation averaged 4.78 percent over the past ten years.

There hasn't been a nationwide decline in home prices since the Great Depression, though there are signs that job losses and slow economic growth are taking a toll, Raines said. Prices are falling in ``a lot of the old Internet cities'' such as San Jose, California, and Seattle, he said.

San Jose home prices, which rose at a 29.7 percent annual rate in 2000, leveled off in 2001. By the first quarter of last year, house prices had dropped 3.3 percent on a 12-month basis.

Economic Outlook

``We don't have a lot of evidence one way or another as to how the economy is going,'' said Raines, a former budget director in the Clinton administration. ``It's uncertain, and I'm not the kind who would say that.''

Gross domestic product increased by 1.9 percent in the last quarter, compared with the 5 percent growth in same quarter in 2002 as the economy emerged from recession. The unemployment rate in April rose to a five-year high of 6 percent as businesses lost 48,000 jobs in the month, and 322,000 so far this year.

The Labor Department today will probably report the jobless rate rose to 6.1 percent in May, which would be the highest since July 1994.

Unemployment may be the undoing of the housing market, where there is a ``bubble in many, many regions,'' said Dean Baker, an economist at the Center for Economic and Policy Research in Washington.

Areas such as New York, New England and California are such a large part of the housing market that their fates could have a lasting impact on the entire U.S., he said.

`Fat'

Mortgage rates at their lowest levels since the Kennedy administration have exacerbated the ``fat'' in housing, Baker said. An increase in the cost of 30-year fixed rate mortgages to near 7 percent from 5.26 percent today would burst bubbles where they exist, he said.

``Housing has helped sustain the economy so far as we've had growth, and when it does burst that could have a big effect'' on prospects for growth in future quarters, he said.

A study by The Economist predicted a ``property price bubble'' in the U.S. and the U.K. would burst in the next few years, leading to consequences ``far nastier'' than seen from the plummeting stock market of 2000 and 2001.

``Some people say, well, they had a housing bubble in Ireland, why can't we have one in the United States?,'' Raines said. ``That's like saying we had a housing bubble in Massachusetts. You can, but you can't work up one in the whole United States just like you probably can't in the whole of Europe.''

Some Cities

Fed Chairman Alan Greenspan in February called a nationwide housing bubble ``quite unlikely,'' in part because there isn't a national housing market. Comparisons to the stock market aren't justified since most people must live in their homes and house transaction costs inhibit speculation, he said.

Robert Shiller, who predicted the 2000 stock market bubble with his book ``Irrational Exuberance,'' said he'd only predict a nationwide housing slump if a worldwide economic slump ``kills'' consumer confidence. Only some ``high-flying'' cities like San Francisco, Denver and Boston are at risk of price depreciations, and the chances of declines in those regions are less than a third, he said from his office at Yale University in New Haven, Connecticut.

``In the last bubble in 1990 the declines were preceded by a slowdown and accelerated by a slowing economy, and the slowdown might be a harbinger of a drop in some places,'' Shiller said. ``Even so we predict increases everywhere. It would be quite daring to predict'' a nationwide housing bubble, he said.

Changing Forecast

Greenspan said earlier this week the Fed is concerned about ``corrosive deflation,'' a general decline in prices that feeds on itself. Falling asset prices in turn bring down spending as people feel less wealthy, which leads to contracting profit margins ``and a type of weakness which we all at least theoretically conclude is far more of a concern than inflation,'' he said.

``Based on what Greenspan said our economist has basically taken any increase by the Fed out of the picture this year,'' Raines said. ``We've always had it in the picture.''

Washington-based Fannie Mae has benefited from falling interest rates and record mortgage-loan refinancings. Fannie Mae, the largest of three government-sponsored enterprises involved in the housing market, buys loans from banks, encouraging more lending. Fannie Mae has $818 billion of loans in its portfolio, and guarantees about $1.2 trillion in mortgage-backed securities.

Fannie Mae this week boosted its expectations for mortgage originations to $3.7 trillion, or 42 percent more than the record $2.6 trillion in 2002.

Expectations the Fed will keep its target interest rate at a 41-year trough this year helped reduce mortgage rates to a record low 5.26 percent this week, according to a Freddie Mac survey. Home refinancings also jumped to record heights, with the index from the Mortgage Bankers Association of America reaching 9,977 this week, 81 percent above its 12-month average.

``We will do more business this year than we did in my first four years at Fannie Mae,'' Raines said.

Last Updated: June 6, 2003 00:06 EDT