With the home price appreciation driving higher turnover rates, mortgage participants have long considered the value of homes as a telling indicator of the state of the housing market. Aside from this, the degree to which house prices rise is also widely seen as a good basis for evaluating prepayment speeds because rapid home price appreciation tends to result in higher cash-out activity.

Based on such an examination, Merrill Lynch analysts concluded there are signs of slowing in home price growth. Merrill's report focused on the different home price series that track housing prices.

Merrill studied results from the National Association of Realtors (NAR) and the Federal Housing Finance Board (FHFB), as well as a series from the agencies known as the Conventional Mortgage Home Price Index (CMHPI). These different series types make use of varying data points. The NAR tracks all purchased homes (regardless of size and type). The FHFB only looks at conventional purchased homes while the CMHPI is based only on conforming conventional loans (excluding jumbos).

All three also vary when it comes to the calculation methodology. While FHFB and the NAR series are merely surveys of prices on new purchases and represent actual dollar price averages, the CMHPI series tracks repeat sales and refinancing appraisals, and not home prices. CMHPI, therefore, provides an index, and not an actual dollar price.

Housing prices between the third and fourth quarter of last year dropped, Merrill's examination of FHFB and NAR data shows. Meanwhile, the CMHPI series does not have fourth quarter results as of yet. These will be released in March. Though preliminary data indicates that home prices are slowing, Merrill said that the declines have to be seen in terms of a longer historical context of home prices.

Merrill said that while the NAR series has been extremely seasonal, the FHFB series has less of a seasonal pattern to it. Though analysts cannot specify the source of the difference between the two, if the difference persists, they deem the drop in the FHFB data to be "more disturbing." They added that it would be interesting to see the CMHPI results for the fourth quarter because this series does not display any seasonality whatsoever.

Analysts also looked at year-over-year patterns. The FHFB series showed the most significant drop, as the year-over-year appreciation was down to 2.4% in the fourth quarter of last year, which is the lowest point since 1995. The CMHPI appreciation also started to dip in the third quarter, dropping to 5.4%, which is its lowest level since the beginning of 1999. However, the NAR series presents a more hopeful picture with home price growth remaining at a robust 7.7%.

Merrill said that, all told, there might be signs of slowing appreciation. This conclusion would be better borne out if the CMHPI series slows in the fourth quarter of 2003. "Investors should keep a close eye on all these series," Merrill analysts wrote as a final note, adding that the FHFB series is the determining factor in terms of agency loan



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