Industry News

Higher Mortgage Rates Tap Brakes On Home Price Growth

March 3, 2006

Fourth Quarter 2005 Appreciation Up 12.5 Percent On An Annualized Basis

McLean, VA – Freddie Mac (NYSE: FRE) released its quarterly national Conventional Mortgage Home Price Index (CMHPI) which rose 12.5 percent in the fourth quarter on an annualized basis, down from a revised third quarter 2005 annualized rate of 13.4 percent and a second quarter 2005 growth rate of 15.4 percent.

"Mortgage rates rose sharply in the fourth quarter and we are starting to see marked slowing in the rate of home price appreciation," said Frank Nothaft, Freddie Mac vice president and chief economist. "According to the Primary Mortgage Market SurveySM the monthly average rate for fixed-rate mortgages and for 5/1 hybrid ARMs rose about one-half of a percentage point between September and December and rates on 1-year ARMs rose even more. Despite some slowing, home price appreciation remained solidly in double-digit territory."

"Last year set records for home sales and single-family construction with the housing market cresting during the third quarter," said Nothaft. "We expect mortgage rates to rise gradually over the course of 2006, which will cause housing activity to ease, but from a blistering pace."

"We've now seen two consecutive quarters of moderation in home-value growth. We expect the trend of slowing growth in home values to continue, with national average home-value appreciation about one-half of last year's rise. This would still be above the long term average growth rate and reflects a still-vibrant but normalizing housing market," added Nothaft. Nationally, home values increased 13 percent from the fourth quarter of 2004 through the fourth quarter of 2005, up from the 12.1 percent annual growth seen over the four quarters ended in December 2004.

The Mountain states showed the strongest home-value appreciation in the U.S., with quarterly appreciation of 19.4 percent at an annualized rate during the fourth quarter, followed by the Pacific region with gains of 18.2 percent. The Pacific region was followed by the South Atlantic states, which posted a gain of 16.8 percent. The Middle Atlantic states experienced average price growth of 13.7 percent with New England after that with 8.9 percent growth. The West South Central division saw an increase of 8.4 percent and the East South Central states had gains of 7.7 percent. The West North Central states had the second slowest annual appreciation of 6.0 percent annually. The East North Central states came in last with a growth rate of 5.6 percent.

"The CMHPI shows home value appreciation heating up in the Mountain states, challenging the reign of the Pacific region as the leader in price growth – population growth in Arizona and Nevada has been particularly fast and has created very strong housing demand," 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 36.2 percent year-over-year, while the slowest appreciating market was in Michigan, where home values were up 3.7 percent over the year.

"The Phoenix metro area recorded the fastest growth in home values during 2005, with a 41.2 percent rise. This area has had fast home-price growth for a while due to strong jobs growth – out of the nearly 2 million nonfarm payroll jobs added to the U.S. economy in 2005, 82,000 of them were created in Phoenix, about equal to the total number added in the five states that make up the East North Central Division where the recession in the manufacturing sector has hit hard. Although jobs growth has remained strong in Las Vegas, home-price growth has moderated greatly to 15.5 percent in 2005 from the more than 40 percent growth in values the city's homeowners saw in 2004," noted Cutts.

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

• Mountain Division (AZ, CO, ID, MT, NM, NV, UT, WY): increased 4.5 percent (19.4 percent, annualized) in the fourth quarter of 2005. In the last 12 months, home values increased 18.9 percent; during the last five years, home values increased 55.1 percent.
• Pacific Division (AK, CA, HI, OR, WA): increased 4.3 percent (18.2 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 18.6 percent, and during the last five years, home values have increased 97.8 percent.
• South Atlantic Division (DC, DE, FL, GA, MD, NC, SC, VA, WV): increased 4.0 percent (16.8 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 18.4 percent, and during the last five years, home values increased 71.6 percent
• Middle Atlantic Division (NJ, NY, PA): increased 3.3 percent (13.7 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 14.1 percent, and during the last five years, home values increased 77.3 percent.
• New England Division (CT, MA, ME, NH, RI, VT): increased 2.2 percent (8.9 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 10.1 percent, and during the last five years, home values increased 71.6 percent.
• West South Central Division (AR, LA, OK, TX): increased 2.0 percent (8.4 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 6.8 percent, and during the last five years, home values increased 28.6 percent.
• East South Central Division (AL, KY, MS, TN): increased 1.9 percent (7.7 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 7.7 percent, and during the last five years, home values increased 29.4 percent.
• West North Central Division (IA, KS, MN, MO, ND, NE, SD): increased 1.5 percent (6.0 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 7.0 percent; over the last five years, home values increased 39.8 percent.
• East North Central Division (IL, IN, MI, OH, WI): increased 1.4 percent (5.6 percent, annualized) in the fourth quarter of 2005. Over the last 12 months, home values increased 6.5 percent, and during the last five years, home values increased 31.7 percent.

Source: Freddie Mac.

'Exotic' mortgages tempt more buyers
The Christian Science Monitor - Mar 2, 2006
The cheap mortgages that fueled America's real-estate boom are beginning to hurt the homeowners they once helped. Higher interest rates and the end of honeymoon periods for too-good-to-be-true teaser rates are causing payment shock for those who said "I do" to exotic loans.
http://www.christiansciencemonitor.com/2006/0302/p02s01-usec.html

Growing List Of Lenders Leaving Montgomery
Washington Post - March 3, 2006
Hundreds of lenders write mortgages in Montgomery County. As many as 40 lending entities, which includes several arms of a single lender, have said they are leaving. It is unclear whether others would also leave. A new ordinance, which goes into effect Wednesday, imposes a penalty of $500,000 per violation against lenders that discriminate against borrowers who are racial minorities by giving them costlier loans than they give to other borrowers, sticking them with big penalties when they refinance, or overcharging them on fees.
http://www.washingtonpost.com/wp-dyn/content/article/2006/03/02/AR2006030201906.html

Washington, DC– The Treasury Department, as chair of the President's Working Group on Financial Markets, is submitting for publication a Notice in the Federal Register today seeking comments on the long-term availability and affordability of terrorism risk insurance, including terrorism risk insurance coverage for group life and for chemical, nuclear, biological, and radiological events.  The comment period closes 45 days after the Notice's date of publication in the Federal Register.

The Terrorism Risk Insurance Extension Act of 2005 was enacted on December 22, 2005.  It requires the President's Working Group on Financial Markets, in consultation with the National Association of Insurance Commissioners, representatives of the insurance industry, representatives of the securities industry, and representatives of policy holders, to perform an analysis regarding the long-term availability and affordability of insurance for terrorism risk, including group life coverage and coverage for chemical, nuclear, biological, and radiological events.  The Federal Register notice seeks comment from these and any other interested parties as a means of satisfying the consultation requirement in the most open and efficient manner.  The President's Working Group must report its findings to Congress by September 30, 2006. 

The President's Working Group on Financial Markets (established by Executive Order 12631) is comprised of the Secretary of the Treasury, the Chairman of the Federal Reserve Board, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission.  The Secretary of the Treasury chairs the President's Working Group. 

REPORTS

• Working Group on Financial Markets - http://www.treas.gov/press/releases/reports/wrkg%20grp%20fin%20mkts%20fed%20register.pdf

Senate Bill 185 addresses predatory lending
State Senator Tom Niehaus
Ohio has the distinction of being the state with the highest number of mortgage foreclosures in the country, and now the Senate is poised to react to this unflattering national ranking. Why is Ohio number one? That is a good question, and there does not appear to be a clear answer. There is a lot of pressure to fix the problem. The question is, what are we fixing and will the proposed solution create more problems than it resolves?
http://news.communitypress.com/apps/pbcs.dll/article?AID=/20060302/EDIT/603020306/1078/Local

Washington, DC– The Treasury Department, as chair of the President's Working Group on Financial Markets, is submitting for publication a Notice in the Federal Register today seeking comments on the long-term availability and affordability of terrorism risk insurance, including terrorism risk insurance coverage for group life and for chemical, nuclear, biological, and radiological events.  The comment period closes 45 days after the Notice's date of publication in the Federal Register.

The Terrorism Risk Insurance Extension Act of 2005 was enacted on December 22, 2005.  It requires the President's Working Group on Financial Markets, in consultation with the National Association of Insurance Commissioners, representatives of the insurance industry, representatives of the securities industry, and representatives of policy holders, to perform an analysis regarding the long-term availability and affordability of insurance for terrorism risk, including group life coverage and coverage for chemical, nuclear, biological, and radiological events.  The Federal Register notice seeks comment from these and any other interested parties as a means of satisfying the consultation requirement in the most open and efficient manner.  The President's Working Group must report its findings to Congress by September 30, 2006. 

The President's Working Group on Financial Markets (established by Executive Order 12631) is comprised of the Secretary of the Treasury, the Chairman of the Federal Reserve Board, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission.  The Secretary of the Treasury chairs the President's Working Group. 

Source: Freddie Mac

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