We have often said that the quarterly Office of Housing Enterprise Oversight (OFHEO) Home Price Index (HPI) report is one of the most interesting of the dozens of surveys and measures of the housing market that come out every month, quarter, or year. The report, which is based on same house sales, is comprehensive - covering hundreds of metropolitan areas and even smaller locales - and is limited to existing homes which have been bought and/or refinanced at some time since the survey began in 1975.



To quote an earlier article in this space:

The OFHEO House Price Index uses data from Fannie Mae and Freddie Mac (the enterprises OFHEO is charged with overseeing) to construct and analyze data on the sales or refinancing of the same house over time. Thus, if a house was mortgaged through a Freddie or Fannie mortgage in 1992, refinanced in 1997, and sold and newly financed in 2006, there will be three data points for that house. Houses which were purchased for cash or through private financing or which have not changed hands or been refinanced through Freddie or Fannie since 1975 are either not included in the survey or may be missing data points corresponding to any non-GSE transactions. The Index currently includes data from 31 million repeat transactions over the last 31 years. Thus, while it is far from a perfect predictor of where we are going, it certainly is a good record of where we have been.

So, as the most recent OFHEO report was issued on Tuesday we were pleased to see our opinion validated by Greg Robb, writing for CBS MarketWatch:

It is the classic American success story, with an economic twist. A relatively obscure economic indicator remains unnoticed only to be discovered and put on center stage and onto the lips of Wall Street traders.

This rags-to-riches story fits the Office of Housing Enterprise Oversight home price index...

The unknown report "is probably the best overall indicator of what is happening overall to home values. We think it is the most important number coming out next week," said David Berson, chief economist at Fannie Mae.

End of unseemly gloat. Here is what the report had to say this week, and it is not good news for the housing sector.

The national second quarter 2006 rate of appreciation was 1.17 percent, an annualized rate of 4.68 percent compared to the annualized rate for the last year; 10.06 percent. 1.17 represented a sharp decline of more than one percentage point from the increase in the first quarter and was the lowest rate of appreciation since the fourth quarter of 1999. This decline in the quarterly rate over the past year is the sharpest since the beginning of OFHEO's House Price Index in 1975.)

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

But, to put it in perspective, house prices over the past year grew faster than the prices of non-housing goods and services - as stated it was 10.06 percent for housing related goods and services and 4.41 percent for other goods and services represented in the Consumer Price Index. Thus, the current retrenchment of the HPI means that the housing sector now more closely resembles the non-housing inflation rate.

The Details: The HPI shows that, while all states demonstrated price appreciation for the last year when annualized, five Midwestern and New England states did show slight price decreases in the second quarter. Maine, Massachusetts, Indiana, Ohio, and Michigan showed price decreases ranging from 0.05 (Ohio) to 0.72 (Michigan) percent.

The number one ranked state in terms of house price appreciation is Arizona. The one-year rate of appreciation is 24.05 percent; however, in quarter two that rate was 2.94. Number two state, Florida at 21.28 for the year was 2.51 for the quarter. And it goes on and on

The Pacific Region showed a 1.45 percent increase in the most recent quarter following a 14.08 percent 1-year appreciation and the low region on the totem pole was the East North Central region which includes the economically hard hit Michigan and Ohio as well as Indiana, Illinois, and Wisconsin. This region had a quarterly increase of 0.21 percent but only an annualized rate of 4.0 percent for the last four quarters. Michigan, in fact, had the greatest number of price decreases among its ranked Standard Metropolitan Statistical Areas. Thirteen of the 16 MSAs in the state had price drops for the quarter.

The South Atlantic Division which includes Florida, Delaware, Washington, DC, Virginia, and Maryland suffered its most significant price decrease since the early 1980s with a four-quarter appreciation rate falling from 17.43 percent to 13.74 percent. In New England the appreciation rate fell from 8.72 to 5.68 percent - with the quarterly rate approaching negative numbers at 0.17 - and Massachusetts which was way up there in price appreciation during the late 1990s and early 2003 now ranks number 48th in appreciation for the most recent quarter.

Ironically, the two states hit hardest by Hurricane Katrina, Louisiana and Mississippi, remain robust. Four-quarter appreciation rates were well above the national average in the New Orleans MSA, Baton Rouge, Gulfport-Biloxi, and Pascagoula. The last two MSAs in fact had the highest appreciation rates since OFHEO began collecting data.

OFHEO is quick to explain that the mix of house purchases versus refinancing can strongly influence HPI results. When an index is constructed using only purchase price date the index increased 8.27 percent rather than the 10.06 for the overall index.

The tables accompanying the HPI are extensive and chances are your local area is included. You can access the entire report at www.ofheo.gov. The report is in PDF format and easy to navigate.