U.S. home prices fell in the first quarter of 2008 -- and at a record pace, too, if you look only at purchases and exclude refinancing activity. The Office of Federal Housing Enterprise and Oversight said Thursday morning that its seasonally-adjusted first quarter index for purchases dropped 1.7 percent from the fourth quarter of 2007, the steepest quarterly decline in the purchase-only index's 17-year history. Annually, purchase prices have fallen 3.1 percent between Q1 2007 and Q1 2008, OFHEO said -- also the largest annual price decline on record. Refinancing activity remains problematic Those sharp price decline numbers contrast with an all-transactions index, however, which adds in refinancing activity. OFHEO reported that its all-transactions house price index fell just 0.2 percent on a quarterly basis, and was actually flat on an annual comparison basis. It's not immediately clear why refinancing transactions would so strongly moderate price declines in the purchase only index. Sources that spoke with Housing Wire Thursday said that one reason may be that borrowers in neighborhoods less affected by the housing slump would be likely more able to refinance; others suggested that the pressure to hit target values could lead to inflated home prices in refinancing transactions. Housing Wire has asked OFHEO for comment on the divergence between refinancing and purchase prices in the past; the agency has yet to issue a formal comment on the matter. OFHEO researchers did note, however, that refinancing activity has been a "important factor that has affected" the overall HPI in recent quarters. Approximately 82.3 percent of all transactions in the first quarter all-transactions HPI were refinancings, OFHEO said, the highest such share of activity since the third quarter of 2003.
a smoking gun?
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A look at the effect of appraisal data from refinance loans on the OFHEO HPI (right) shows that refinancings led the OFHEO HPI to significantly overshoot the purchase-only HPI during the housing boom, and that now refinancing activity is leading the HPI to undershoot purchase-only transactions during the bust. "I'd call that [graph] a smoking gun," said one MBS analyst, who asked that his name not be used. "Appraisers were inflating home values on refis during the boom, enabling the home ATM, and now they're faced with trying to keep homeowners in their home in many cases." While the refinance/purchase divergence remains unsolved from a substantive standpoint, OFHEO directory James Lockhart did offer commentary on why OFHEO's price index appears to show less severe price corrections relative to other indices, such as the Standard & Poor's/Case-Shiller price index. “While house price declines are widespread, homes financed with prime, conforming mortgages continue to hold up better than those financed with other types of mortgages, a phenomenon we’ve been observing for the last several quarters,” Lockhart said. Between February and March, OFHEO purchase-only figures show that home prices have fallen 0.4 percent nationally, and are now 3.7 percent below the April 2007 peak in conforming home prices. Looking at purchase-only transactions, eight states posted quarterly price declines above 3 percent; two states -- California and Nevada -- saw prices fall more than 8 percent. Every Census Division experienced a price decline in the latest quarter when looking at purchase-only transcations, OFHEO said; declines were strongest in the Pacific Census Division, which saw purchase prices fall 5.9 percent. Using the all-transactions index, however, 164 of 292 MSAs tracked by OFHEO posted positive quarterly price gains -- underscoring the wide divergence in price trends when refinancing activity is included in the data. For more information, visit http://www.ofheo.gov.