Freddie Mac today announced that its Conventional Mortgage Home Price Index increased by 8.7 percent on an annualized basis in the first quarter of 2006, down from a revised fourth-quarter-2005 rate of 12.9 percent and a third-quarter-2005 growth rate of 13.7 percent.

Nationally, home values increased 12.7 percent from the first quarter of 2005 through the first quarter of 2006, down from the 12.9 percent annual growth seen over the four quarters ended in March 2005.

“Home prices are starting to feel the effects of the upward trend in mortgage rates,” said Frank Nothaft, Freddie Mac vice president and chief economist. “That trend continued during the first quarter with 30-year fixed mortgage rates climbing from an average 6.15 percent in January to 6.32 percent in March, according to the Primary Mortgage Market Survey. Rates on adjustable-rate mortgages rose even faster, with the introductory rates on 1-year Treasury-indexed ARMs rising from an average of 5.16 percent at the start of the year to 5.51 percent by the end of March.

“We have seen a lot of mixed news with respect to the housing market in the past few months. Construction employment, which had been one of the reliable growth sectors, was relatively flat throughout the first quarter. But a gradual and orderly slowing of the housing market has been anticipated for some time now as we come off of record-high sales and single-family home construction. We anticipate about a 7 percent decline in home sales this year and a transition from a seller’s market to a buyer’s market.

The Pacific states posted the strongest home-value appreciation in the U.S., with quarterly appreciation of 13.3 percent at an annualized rate during the first quarter, followed by the South Atlantic region with gains of 12.7 percent. The Middle Atlantic region came next, with gains of 9.8 percent. The Mountain states experienced average price growth of 9 percent with the West South Central states after that with 8.6 percent growth. The East South Central division saw an increase of 5.7 percent while New England had gains of 5.2 percent. The East North Central states had the second slowest annual appreciation of 3 percent annually. Finally, the West North Central states came in last with a growth rate of only 2.5 percent.

“The Pacific region reclaimed its title of real estate leader, with Hawaii gaining the fastest at a 20.7 percent annualized growth rate for the first quarter,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “Two states, Iowa and South Dakota, are showing negative growth for the quarter, but year-over-year they are still up more than 4 percent. 

“We are starting to see significant signs of weakness in areas that have been hard hit by manufacturing job losses,” Crews Cutts said. “As a result of job losses three to five years ago we are seeing rising inventories of foreclosed properties in Michigan, Ohio and Indiana and other places, and while most indices are still up, the home-price growth rates in those areas are slowing markedly already. For example, in Detroit, home prices grew just 0.3 percent on an annualized basis in the first quarter and 1.9 percent over the last 12 months. But four smaller cities – Sandusky, Ohio; Anderson, Ind.; Muncie, Ind.; and Saginaw, Mich. – are already showing negative changes year-over-year.

“The first quarter of 2006 marks the third consecutive quarter of moderation in home-value growth. We are expecting about half of the increase that we saw in the national average home-value appreciation in 2005 for 2006, which puts annual home-price growth between 6 and 8 percent, depending on how fast interest rates rise over the remainder of the year. This would still be above the long-term average growth rate and reflects a still vibrant but normalizing housing market.”

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