Appreciation Strongest in Decades, But Some Markets are Left Out

Just when experts were predicting that home price appreciation would slow down, a government report shows that prices rose at the fastest rate in nearly three decades during the second quarter of 2005, but that doesn't mean home prices are rising at a fast clip across the board.

Nationally, home prices rose at 13.43% in the second quarter of this year, according to the Office of Federal Housing Enterprise Oversight.

Analysts at Friedman, Billings, Ramsey & Co., Arlington, Va., say they were not surprised by the strong price growth, noting that low interest rates and stronger-than-expected refinancing activity helped to keep home values rising.

But in a recent report, FBR also said the OFHEO numbers are "misleading" unless you look at price movement in each of the metropolitan areas covered by the report.

In fact, in 235 metropolitan statistical areas, representing 62% of the total market, price appreciation ranged from 0.5% to 10.0%, FBR said. And in 88 metropolitan areas, representing 23.2% of the total, appreciation fell between 2.5% and 5%. In 142 metropolitan markets, representing 26.8% of the market, house prices rose by more than 10%.

In other words, exceptionally strong appreciation in a handful of markets pushed the national average upward, FBR said.

Year-over-year, house prices rose 19.44% on average in 54 metropolitan areas that FBR analysts say are experiencing "speculative bubbles."

But not all of the "bubble markets" are showing signs of trouble. While home price appreciation accelerated nationally during the second quarter, the rate of price gains actually slowed down in almost half of the markets that FBR defines as bubble markets.

The states with the highest appreciation rates were Nevada, where home prices rose 28.13% year-over-year; Arizona, at 27.82%; Hawaii, at 25.92%; California, at 25.16%; and Florida, at 24.45%.

Cities with high rates of appreciation also seem to be concentrated in the Sun Belt. FBR, in a report on the OFHEO numbers, points out that two states, Florida and California, account for more than half of the metropolitan areas with the highest rate of home price appreciation in the second quarter of this year.

Nationally, no metropolitan area showed a decline in home prices on a year-over-year basis, though a small number of cities saw a decline from the first quarter to the second quarter, FBR noted.

Actual house price appreciation has averaged 8.79% over the past four years, FBR noted. But in 2004 and now the first half of 2005, the pace of appreciation has exceeded even that heady rate.

Meanwhile, OFHEO isn't the only organization that is reporting strong gains in home prices. Freddie Mac recently reported that its national conventional home price index saw second-quarter home price appreciation of 15%, up from a 10.5% annual rate in the first quarter.

"The steady decline of fixed mortgage rates during the second quarter helped to propel home sales higher and drive up house prices," said Frank Nothaft, Freddie Mac's chief economist, in a news release.

The average rate for 30-year fixed rate mortgages fell from a high of 6.04% the week of March 31 to a low of 5.53% the week of June 30. Home sales in the second quarter reached a record 7.62 million pace, he said.

SNAPSHOT: States with Strongest Year-Over-Year Increases In Home Prices

State 2nd Q '05 Gain

Nevada 28%

Arizona 28%

Hawaii 26%

California 25%

Florida 24%

Source: Friedman, Billings, Ramsey

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