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Biggest drop in US home prices in 25 years

Freddie Mac index falls by 1.3% on tighter lending and turbulent markets

NEW YORK – HOME prices in the United States dropped the most in a quarter-century over the three months to end-September on an annualised basis as inventories, restrictive lending and a credit crunch yanked support from the market, a Freddie Mac index showed on Tuesday.

The Freddie Mac Conventional Mortgage Home Price Index Classic Series fell by an annualised 1.3 per cent last quarter, compared with appreciation of 0.5 per cent in the second quarter, the No.2 home funding company said in a statement.

Year over year, prices rose by 1.9 per cent, a sharp retreat from the 7.8 per cent growth seen a year earlier, it said.

‘Lenders have tightened underwriting standards and the turbulence in the capital markets led to a spike in the cost of jumbo loans,’ Mr Frank Nothaft, Freddie Mac’s chief economist, said in the statement. That added to the weight on prices from house inventories that have reached their highest level since 1985, he said.

The Freddie Mac index measures all loans outside government programmes and includes data from both home purchase transactions and mortgage refinancings based on appraisals.

The index echoes trends in other widely watched measures.

The Standard & Poor’s Case-Shiller National Home Price Index last month showed prices had fallen by 4.5 per cent in the third quarter from a year earlier.

Declining home prices have triggered a crisis in mortgage lending by revealing weaknesses across hundreds of thousands of loans made through the US housing boom.

Loans made to risky, sub-prime borrowers and those that required no equity from the borrower have led to soaring defaults, leading lawmakers and the Bush administration to pursue various efforts to stall resulting foreclosures.

A plan supported by Treasury Secretary Henry Paulson that aims to freeze rates on many sub-prime loans will do little to slow the housing downturn, analysts said.

‘Many government and policymakers feel this is a sub-prime problem, which is completely wrong,’ said Mr Paul Miller, an analyst at Friedman Billings Ramsey, in a research note. ‘This is a high loan-to-value and overvalued housing problem!’

 

Source: REUTERS (The Straits Times 6 Dec 07)

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