The Office of Federal Housing Enterprise Oversight released its Home Price Index last Tuesday, reporting that average home prices in the U.S. for the third quarter rose 12.97% from 3Q03 - the highest increase in 25 years. For the quarter, OFHEO reported a 4.62% gain, equivalent to an 18.48% annualized rate, the largest increase recorded since the index's inception in 1975.
The OFHEO attributed the home price gains to several factors, including the decline in long-term rates, which made purchasing a house less expensive. The agency also mentioned the drop in the number of refinancings.
In a report released after OFHEO's announcement, Merrill Lynch said that the steady drop in mortgage rates probably drove home price growth. Freddie Mac reported that 30-year fixed mortgage rates fell to 5.8% in August and September from 6.3% in May and June.
Aside from this, the recent drop in refinancings, compared to levels seen in the third quarter of last year and the second quarter of this year, might have also inflated the numbers somewhat, OFHEO said. The agency reported that increases in the index might have been held down by the appraised values used for refinancing low LTV mortgages, which might not have kept up with recent market price hikes. But even just considering purchase loans and not taking into account the refinancing effect, year-over-year appreciation was just upwards of 10%, greater than it has been in the last 25 years.
By state, OFHEO said Nevada recorded the strongest gain in home prices at nearly 36%. Hawaii followed at 28%, California at 27%, the District of Columbia at 24% and Rhode Island at 22%. The smallest gains were recorded in Indiana, Utah and Texas.
Art Frank, head of mortgage research at Nomura Securities, said that the driving force for the higher prices on both coasts is the current imbalance between supply and demand, specifically in large metropolitan areas. For instance, both the Los Angeles and San Francisco metropolitan areas are largely built out. He said that supply is limited on one hand by restricted development caused by such factors as environmental restrictions. However, while supply is restricted, there is significant demand coming from the formation of new households. One factor driving demand in these large metro areas is immigration. For instance, population growth in New Jersey from 1990 to 2000 was entirely due to immigration from abroad, while increases attributed to native-born Americans has been zero.
Merrill Lynch noted in its report that high LTV mortgages for both conventionals and Ginnie Maes in states with high home price growth had higher prepayments compared to states with less home price gain. Analysts attributed this to the borrower access to cashouts. For FHA borrowers, there is also the possibility that with home prices rising, they can now qualify for a conventional loan and do away with their mortgage insurance premium. Furthermore, Merrill also cited the trading-up phenomenon' that should make speeds in states with more appreciation to be faster by a few CPR.
Merrill analysts noted the data by state still supports their theory that accelerated home price growth currently drives high prepays, adding that the states with the greatest six-month home price appreciation, including Nevada and California, also experienced significant rises in prepayments. For instance, Nevada had the highest six-month CPR through September, while California had the third highest. Correspondingly, Texas was the third slowest state in CPR as well as in terms of home price increases.
Freddie Mac data
Freddie Mac also released its report last Thursday and reported its quarterly Conventional Mortgage Home Price Index jumped 12.4% from the third quarter 2003 through the third quarter 2004. The GSE's Chief Economist Frank Nothaft said that "the cumulative effect of two years in which 30-year fixed mortgage rates averaged just 5.8% and an improving employment picture this year have buoyed the housing market to new highs." For the quarter, home values surged 16% on an annualized basis.
Nothaft added that Freddie's home price index for the third quarter showed strong growth mainly along the coastal areas, where populations are increasing rapidly and have minimal available land on which to build new homes. "We are expecting national home price growth to slow next year as a result of higher interest rates, however, there is no reason to expect a decline in house prices in any area as long as job growth continues," said Nothaft.
By regions, the Pacific states showed the largest gains at 20.9%. These were followed by a 16.5% increase in prices for the Middle Atlantic states and 16.2% for New England. Regions reporting the slowest growth were West South Central at 4.5% and East South Central at 5.8%.
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