The Office of the Chief Economist of Freddie Mac issued its monthly economic outlook for July on Monday and, in the narrative provided a helpful analysis of the reasons for the confusing messages emerging from various reports on current house prices.

The outlook states the obvious; the housing market has cooled abruptly after several years of superheated activity and the slowdown in sales and increasing backlogs of unsold houses are threatening to undermine not only property values but also sectors of the broader economy. Yet various economic indicators are pointing in different directions when it comes to housing prices.



Each of the reports that the housing industry, the stock market, and the media relies on has advantages. One example is the timeliness of the data. The two reports that come out monthly, shortly after the books are closed on the previous month's sales are summaries of new home sales issued by the U.S. Census Bureau and the report on existing homes from the National Association of Realtors®. While timely, capturing the previous month's activity within weeks, the numbers are easily influenced by where the sales took place. A sudden surge of sales in Indiana, for example, will cause the median price of a home to drop while a strong month in the Boston area will have the opposite effect. An influx of first-time buyers into the market in a given month will also cause median prices to trend downward. Most recently (May) these two monthly reports showed a 0.9 percent decline in the sale price of new homes and 2.1 percent in the median price of existing homes.

Other reports overcome this problem by reporting on same house sales. This would include the quarterly report by the Office of Federal Housing Enterprise Oversight (OFHEO) which uses data collected from Freddie Mac and Fannie Mae to track houses across the years as they are sold or refinanced and Freddie Mac's Conventional Mortgage Home Price Index (CMHPI) which does not include refinancing in its analysis of same home purchases over time. While these studies yield more apples-to-apples comparisons the OFHEO report tends to miss trends because appraisal values upon which refinances are based tend to lag behind actual prices and both OFHEO and CMHPI exclude a large portion of the market which falls outside of Freddie Mac and Fannie Mae maximum loan limits. The most recent of these studies for the first quarter shows a slight increase in prices from the same period a year earlier with the CMHPI posting a gain of 2.8 percent.

The other major study is the Standard & Poors/Case-Shiller® National Home Price Index. This is also a repeat sale comparison but it covers the higher priced loans, government insured loans and privately financed purchases that are outside the purview of the two secondary market reports. But nobody is perfect and Case-Shiller is limited geographically because many areas, even whole states are not included because of limited home sale data. This index may also reflect trends in top-end housing markets that diverge from conventional financing and may give more weight to higher priced regions. The most recent Case-Shiller reported 1.4 percent decline in housing prices in the first quarter of 2007 compared to the same period in 2006.

The July Economic Outlook, however, concludes that the differences among the various studies should not make people overlook the similarities. "All (the studies) show that national price growth has shifted down from the double digit gains of 2004-2005 to something near zero with several markets down from a year ago." The studies have magnified regional disparities but property values in most areas are still well above the levels or two or three years ago.

The narrative concludes by saying that "while a steady job market and growing national economy may help limit the downside risks to housing prices, several risks - the elevated levels of homes for sale, recent increases in mortgage rates, and rising foreclosures of subprime borrowers - point to continued weakness in the months ahead."

Where the particulars of the statistical portion of the outlook are changed this month they are changed dramatically from the forecast for June. Major deviations from the last outlook include the predictions for home sales which are now projected at 6.23 million units (annualized) for the second half of the year and 6.28 million for the entire year. The year long figure was estimated at 6.41 million units one month ago.

Predictions for national home price appreciation for the year, projected at 1.5 percent last month is now at 1 percent and the growth estimate for next year has decreased from 2.5 percent to 1.8 percent.

Mortgage activity has dropped from a forecast of $2.79 trillion in June to $2.75 trillion based on fewer home sales, slower growth in home prices, and rising interest rates. Refinancing is expected to represent 42 percent of total mortgage activity this year, the lowest percentage in seven years and outstanding mortgage debt is projected to grow by 5.9 percent this year, the slowest growth in over a decade.