by Calculated Risk on 9/05/2006 10:15:00 AM

The Office of Federal Housing Enterprise Oversight (OFHEO) released the Q2 2006 House Price Index.

House Price Appreciation Slows; OFHEO House Price Index Shows Largest Deceleration in Three Decades

WASHINGTON, D.C. – U.S. home prices continued to rise in the second quarter of this year but the rate of increase fell sharply. Home prices were 10.06 percent higher in the second quarter of 2006 than they were one year earlier. Appreciation for the most recent quarter was 1.17 percent, or an annualized rate of 4.68 percent. The quarterly rate reflects a sharp decline of more than one percentage point from the previous quarter and is the lowest rate of appreciation since the fourth quarter of 1999. The decline in the quarterly rate over the past year is the sharpest since the beginning of OFHEO’s House Price Index (HPI) in 1975. The figures were released today by OFHEO Director James B. Lockhart, as part of the HPI, a quarterly report analyzing housing price appreciation trends.

“These data are a strong indication that the housing market is cooling in a very significant way,” said Lockhart. “Indeed, the deceleration appears in almost every region of the country.”

Possible causes of the decrease in appreciation rates include higher interest rates, a drop in speculative activity, and rising inventories of homes. “The very high appreciation rates we’ve seen in recent years spurred increased construction,” said OFHEO Chief Economist Patrick Lawler. “That coupled with slower sales has led to higher inventories and these inventories will continue to constrain future appreciation rates,” Lawler said.

House prices grew faster over the past year than did prices of non-housing goods and services reflected in the Consumer Price Index. While house prices rose 10.06 percent, prices of other goods and services rose only 4.41 percent. The pace of house price appreciation in the most recent quarter more closely resembles the non-housing inflation rate.

From a bubble perspective, three of the most closely watched cities have been Boston, Sacramento and San Diego - all three have shown signs of a housing slowdown.

Boston: -0.61% in Q1 2006 and 2.92% for the year.

Sacramento: -0.38% for the quarter, and 6.51% for the year.

San Diego: 0.15% for the quarter, and 5.61% for the year.

The housing slowdown is starting to show up in the prices for these areas.