HOME INDEX: A comprehensive housing price index recorded its deepest decline in 17 years. Have we hit bottom yet?

Last Thursday the Office of Federal Housing Enterprise Oversight reported the largest quarterly home-price decline since the federal index's inception in 1991. Good news for prospective homebuyers? Perhaps, if they've got squeaky-clean credit.

Housing Market in a Slump

The Office of Federal Housing Enterprise Oversight (OFHEO) is a federal index of home prices. The OFHEO collects the numbers from the nation's top two mortgage buyers, government-sponsored companies Fannie Mae and Freddie Mac.

The federal index excludes two types of loans:

1. jumbo loans—those that exceed $729,750 in high-cost areas
2. most subprime mortgages—those for borrowers with poor or questionable credit

Because it doesn't factor high-risk loans into its calculations, the OFHEO is considered the most comprehensive index of the nationwide housing market. Instead of detailing an average price, the OFHEO report gives the percentage of change.

Here are its latest findings:

• Compared with last year, home prices fell 3.1% in the first quarter of 2008.
• Home prices dropped 1.7% from the fourth quarter of 2007 to the first quarter of 2008—the largest quarterly decline recorded.
• The only other price decline since 1991 was a year-over-year drop of 0.45% in the last quarter of 2007. (A method of evaluating two or more measured events that compares the results of measurement at one time period with those from another time period (or series of time periods), on an annualized basis. Year-over-year comparisons are a popular way to evaluate the performance of investments. Any measurable events that recur annually can be compared on a year-over-year basis—from annual performance, to quarterly performance, to daily performance.)
• Home prices fell in 43 states.
• California and Nevada saw the steepest declines, at 8%.

Foreclosures on the Rise

Since last year, plummeting home prices have become more common. As more home values dropped below original contracted mortgage prices, many homeowners have had to foreclose on their houses. In fact, the Washington-based Mortgage Bankers Association reported March 6 that new foreclosures jumped to 0.83% of all home loans at the end of 2007, an all-time high since reporting began in 1979.

The trend continues and seems to be worsening. According to Credit Suisse, continuously falling home equity could cause almost 13% of home mortgage owners to foreclose on their homes by 2012.

Enticed by Low Housing Prices? Check Your Credit First

Though home prices are down, obstacles to buying a home are up. According to a Federal Reserve survey of senior loan officers published May 5:

• Nearly two-thirds of U.S. banks are only lending to their most creditworthy borrowers.
• Three-fourths of U.S. banks have made it harder for people with bad or limited credit to get loans.

Overall, the Mortgage Bankers Association predicts the number of new mortgages will drop 18% this year from 2007.

Copyright © 2008 Informify

Sources

Home Prices Tumble 3.1% in First Quarter, Ofheo Says (Update2) (Bloomberg, 5/25/08)

Home price index posts largest drop in history (Associated Press, 5/23/08)

UPDATE 1-U.S. 1st-qtr home price declines at record - OFHEO (Reuters, 5/22/08)

Question for Readers:

Do you see the current drop in home prices as a green light for buying up some residential real estate?