July, 2006

Housing Report: Home Price Appreciation Begins to Slow

Prices still rising, but off the record pace of recent years.

By Steve Easley

The long-awaited slowdown in real estate appreciation has begun with a whimper, according to the latest house price statistics released on June 1 by the Office of Federal Housing Enterprise Oversight (OFHEO).

While OFHEO reported that some meaningful deceleration in prices during this year’s first quarter has now become evident, appreciation across the U.S. held up to a still vigorous annual rate of 8.12% during the three-month period and home prices were up 12.54% for the year ending on March 31. By comparison, the cost of non-housing goods and services on the Consumer Price Index increased 4.2% for the 12 months running through the end of the first quarter.

However, economists at NAHB expect to see further downward movement in national rates of home price appreciation in coming quarters and are projecting that annual gains should level off in the 5%-6% range, close to the average rate of growth in housing values experienced over the long term prior to the boom of the past few years.

Also, OFHEO’s House Price Index (HPI) includes home refinancings, which tend to push appreciation rates higher than if only home purchases were included.

The 2.03% increase in home prices during the first quarter represented a decline of roughly one full percentage point below the final quarter of 2005 and was the lowest rate since the first quarter of 2004.

“These data show average housing prices still growing stronger than some might have expected,” says James Lockhart, OFHEO’s acting director. “They do indicate, however, that price growth is moderating in some parts of the country, particularly in areas where prices have been rising the most.”

“Increasing sales inventories are apparently giving buyers greater bargaining power, while increasing interest rates are dampening demand,” adds OFHEO Chief Economist Patrick Lawler.

Although price growth has dropped significantly in Arizona, it had the greatest appreciation rate of any state in the country—32.81%—for the one-year period ending on March 31, according to the OFHEO report. But appreciation in the state dropped sharply in the first quarter, from 7.4% to 3.8%, which was still higher than the national average.

Housing prices continued to advance rapidly in Florida, at a 4.29% rate for the first quarter and 26.62% for the year, making it the second strongest state for appreciation on a one-year basis. Florida accounted for half of the nation’s 20 strongest markets for housing appreciation for the year ending on March 31. The closely watched Miami area saw average price gains of 4.8% during the first quarter and the city ranked in 13th place for the year, with a gain of 28.03%.

For the third quarter, price gains were particularly robust in some areas still recovering from Hurricane Katrina, including New Orleans-Metairie-Kenner, up 4.34%, and Hattiesburg, Miss.

On a yearly basis, following Arizona and Florida, the top 10 states for home price gains, including the District of Columbia, were:

• Hawaii                         24.99%

• Oregon                        20.96%

• Washington, D.C.       20.84%

• Maryland                     20.47%

• Idaho                           20.31%

• Washington                 19.37%

• California                    19.20%

• Virginia                       18.12%

At the bottom of the list were:

• Michigan                                 2.86%

• Ohio                                        3.26%

• Indiana                                    4.18%

• Nebraska                                 4.45%

• Kansas                                     4.47%

• Iowa                                        4.75%

• Colorado                                 5.10%

• Kentucky                                5.53%

• Texas                                       5.93%

• South Dakota                          6.05%

For the first time since the fourth quarter of 2002, OFHEO reported, some states saw negative quarterly appreciations rates. Iowa and South Dakota both experienced small price declines between the fourth quarter of 2005 and the first quarter of 2006.

OFHEO pointed out in its latest report that its HPI includes refinancings, which tend to inflate housing prices. “Homes with cash-out refinances likely are disproportionately those that have experienced the most appreciation,” because higher appreciation rates give owners more equity from which they can take cash out, the report noted. “Thus, the HPI dataset, which includes appraisals used for cash-out refinances, may have relatively more rapidly appreciating houses than the purchase-only index.”

Over the past year, OFHEO’s purchase-only index rose 10.04%, 2.5 percentage points lower than the increase indicated by the House Price Index.