FHFA Index Shows 1.6% Drop in Third-Quarter Home Prices

Home prices in the United States continued to fall in the third quarter, with declines widespread in most parts of the country, according to data released by the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) Wednesday.

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FHFA's purchase-only house price index (HPI) is calculated using sales data from mortgages acquired by ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com. It was 1.6 percent lower on both a seasonally adjusted and unadjusted basis in the third quarter when compared to the second quarter of 2010. Home prices fell 3.2 percent from the third quarter of 2009 to the third quarter of 2010 in FHFA's index.

The agency's seasonally adjusted monthly index for September was down 0.7 percent from its August value. The previous monthly increase reported for the July-to-August period was revised from an initial estimate of +0.4 percent to 0.0 percent.

The research firm ""Capital Economics"":http://www.capitaleconomics.com issued a market commentary note on the heels of FHFA's home price report.

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The company's analysts point out that the 1.6 percent quarter-over-quarter drop in the third quarter more than reversed the second quarter's 0.7 percent rise to take prices to what Capital Economics has deemed a new cycle low. Based on FHFA's measure, home prices are currently 14 percent below their 2006 peak.

Capital Economics economist Paul Dales says the quarterly price decline was largely due to the initial plunge in home sales seen after the expiry of the homebuyer tax credit in April. However, the fact that prices fell by 0.7 percent between August and September - some months after the tax credit expired - suggests that a more sustained decline is underway, according to Dales.

""The U.S. economy once again has to contend with a faltering housing market, in which both prices and activity are falling,"" Dales said. ""Thankfully, this second downward leg should be shorter and less severe than the one that brought the financial system to its knees a few years ago.""

Overall, by the end of next year, Dales and his team think that prices will have fallen by another 5 percent, as housing supplies remain high, demand remains weak, and continued depreciation leaves half of all households without enough equity to qualify for a new loan.

If Dales' price projections hold true, he says its ""unlikely to derail the economic recovery, but it will certainly hold it back.""

FHFA's all-transactions HPI, which includes data from mortgages used for both home purchases and refinancings, rose over the latest quarter. The index increased 1.1 percent from Q2 to Q3, although it is down 1.2 percent compared to the third quarter of 2009.