Industry News

Gradually Rising Mortgage Rates Begin To Slow The Pace Of House Price Appreciation

December 5, 2005

Third Quarter 2005 Appreciation Up 12.3 Percent On An Annualized Basis

McLean, VA – Freddie Mac (NYSE: FRE) quarterly national Conventional Mortgage Home Price Index (CMHPI) rose 12.3 percent in the third quarter on an annualized basis, down from a revised second quarter 2005 annualized rate of 15.3 percent.

"The gradual rise in mortgage rates during the third quarter moderated home price gains, compared with the second quarter," said Frank Nothaft, Freddie Mac vice president and chief economist. "According to the Primary Mortgage Market SurveySM the weekly average rate for fixed-rate mortgages and for 5/1 hybrid ARMs rose about three-eights of a percentage point from the end of June to the end of September. Thirty-year fixed-rate loans rose from an average rate of 5.53 percent as of June 30 to an average of 5.91 percent as of September 29."

"Home sales and single-family housing starts are still expected to set a new record this year," said Nothaft. "The devastating effects of hurricanes Katrina, Rita and Wilma will likely keep overall construction material costs high and add to new construction in the affected region."

Nationally, home values increased 12.1 percent on an annual basis, from the third quarter of 2004 through the third quarter of 2005, down from a 14.0 percent annual growth rate for the year ending with the second quarter of 2005 and the slowest annual growth rate reported for the last five quarters. "It looks as if home sales and single-family construction crested during the third quarter. Our forecast for 2006 has about a seven percent decline in new starts and home sales, and with more moderate home price gains than in 2005," added Nothaft.

The South Atlantic and Mountain divisions showed the strongest home-value appreciation in the U.S., with quarterly appreciation of 19.5 percent at an annualized rate during the third quarter, followed by the Pacific and Middle Atlantic areas with gains of 15.2 percent and 13.3 percent, respectively. The East South Central and New England states experienced average price growth of 8.2 percent and 7.8 percent, respectively. The East North Central division saw an increase of 6.6 percent. The West South Central states had gains of 6.2 percent and the West North Central states had the slowest annual appreciation of 6.0 percent annually.

"The CMHPI continues to show strong growth primarily along the coasts – areas where the population is growing rapidly, job growth is strong and land scarcity is pushing up the cost of housing," noted Amy Crews Cutts, Freddie Mac deputy chief economist. By state, the most robust housing market was in Arizona, which recorded annual home-value gains of 31.3 percent over the year through the third quarter, while the slowest appreciating market was in Michigan, where home values were up 4.1 percent over the same one-year span.

"The impact of localized job losses or job gains on communities is more visible in the state and metropolitan area data that we release as part of the CMHPI. For example, nonfarm payroll employment was up 102,700, or 4.3 percent in Arizona over the twelve months ending in September 2005. In contrast, there was a 36,500 job loss in Michigan over the same period," noted Cutts.

The Conventional Mortgage Home Price Index shows the following regional performances:

South Atlantic Division (DC, DE, FL, GA, MD, NC, SC, VA, WV): increased 4.6 percent (19.5 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 17.6 percent, and during the last five years, home values increased 67.5 percent

Mountain Division (AZ, CO, ID, MT, NM, NV, UT, WY): increased 4.6 percent (19.5 percent, annualized) in the third quarter of 2005. In the last 12 months, home values increased 16.2 percent; during the last five years, home values increased 50.6 percent.

Pacific Division (AK, CA, HI, OR, WA): increased 3.6 percent (15.2 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 17.3 percent, and during the last five years, home values have increased 93.4 percent.

Middle Atlantic Division (NJ, NY, PA): increased 3.2 percent (13.3 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 13.1 percent, and during the last five years, home values increased 74.0 percent.

East South Central Division (AL, KY, MS, TN): increased 2.0 percent (8.2 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 7.3 percent, and during the last five years, home values increased 28.3 percent.

New England Division (CT, MA, ME, NH, RI, VT): increased 1.9 percent (7.8 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 9.7 percent, and during the last five years, home values increased 71.5 percent.

East North Central Division (IL, IN, MI, OH, WI): increased 1.6 percent (6.6 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 6.4 percent, and during the last five years, home values increased 31.6 percent.

West South Central Division (AR, LA, OK, TX): increased 1.5 percent (6.2 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 6.2 percent, and during the last five years, home values increased 27.3 percent.

West North Central Division (IA, KS, MN, MO, ND, NE, SD): increased 1.5 percent (6.0 percent, annualized) in the third quarter of 2005. Over the last 12 months, home values increased 6.6 percent; over the last five years, home values increased 39.3 percent.

Jointly developed by Freddie Mac and Fannie Mae and first published by Freddie Mac starting in 1994, the Conventional Mortgage Home Price Index features indexes for the nine Census divisions as well as a national index. The national index is the average of the nine divisional indexes weighted by the distribution of one-unit detached, single-family structures in each Census division.

Unlike other home price indexes based on mean or median values of homes sold during a given period, the Conventional Mortgage Home Price Index is constructed, using regression techniques, from observations of actual sales prices or appraised values of the same homes over time. The street addresses of properties that serve as collateral for mortgages funded by the two secondary mortgage market firms are first processed using software certified by the United States Postal Service to create a uniform address format and are then matched to identify consecutive transactions on the same property. There are currently 30.6 million records in the repeat-transactions database used to construct the Conventional Mortgage Home Price Index – this database includes transactions on one-unit detached and single-family townhome properties serving as collateral on loans originated through the third quarter of 2005 and purchased by Freddie Mac and Fannie Mae by October 31, 2005.

Freddie Mac publishes the Conventional Mortgage Home Price Index each quarter. Index values and growth rates for the nation as a whole as well as for the nine Census divisions, the 50 states and the District of Columbia, and 390 metropolitan statistical areas (MSAs) and metropolitan divisions can be found on Freddie Mac's web site, www.freddiemac.com/finance/cmhpi/.

copy; 2005 by Freddie Mac.

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