U.S. Home Prices Remained High in 2008

U.S. Home Prices Remained High in 2008
By David Andrews

Nationwide, single family home prices remained high in 2008. According to data recently released by the Federal Housing Financing Board (FHFB), the purchase price for single family homes financed by conventional mortgages averaged $304,600 in 2008, up 1.4 percent from 2007. The average purchase price of single family homes financed by conventional mortgages in the United States reached an all time high of $306,400 in 2006.

The contract interest rate for 30-year, fixed-rate mortgages of $417,000 or less averaged 6.05 percent in 2008. In December, however, the contract interest rate fell to 5.52 percent. The Federal Open Market Committee lowered its target rate for Federal Funds to between zero and one-quarter percent on December 16th, so the contract interest rate for mortgages can be expected to fall further in January.

Even though nominal home prices rose 1.4 percent last year, real home prices fell 1.0 percent in 2008, the third consecutive year of decline. Earlier in January, the Bureau of Labor Statistics (BLS) reported that the Owners’ Equivalent Rent of Primary Residence (OER) component of the Consumer Price Index (CPI) rose 2.4 percent in 2008. Real home prices are calculated by dividing the average purchase price by the OER index. In constant 1982 dollars, single family home prices peaked in 2005. Real home prices are less than 10 percent lower than their 2005 peak, but remain 20 percent higher than 2000 levels.

In most years, the Owners' Equivalent Rent component of the Consumer Price Index correlates closely with what renters pay as measured by the rent component of the CPI. For the past 20 years, the difference in the annual rate of change in these two components has been less than 1.0 percent. In 2008, however, rent prices increased by 3.7 percent compared to the 2.4 percent rise in the OER. Anecdotal evidence suggests that some homeowners may have become renters over the last year, because of the increase in the number of foreclosures caused by the sub prime mortgage crisis.

The accompanying chart shows the nominal change in the purchase price of single family homes, the percent change in the Owners’ Equivalent Rent (OER), and the change in the real housing price from 2005 to 2008. At the height of the sub-prime lending boom in 2005, the average purchase price jumped by 14.4 to nearly $300,000. The Owners’ Equivalent Rent component of the CPI did not keep pace that year, accounting for the large spike in real home prices.

When real housing prices previously peaked in 1989, single family homes across the United States cost an average of $142,800. According to the FHFB, the nominal purchase price of homes financed by conventional mortgages fluctuated between $142,000 and $147,000 from 1989 through 1995. In real terms, however, housing prices fell by 25 percent during that six-year period. If a similar pattern occurs during this housing cycle, real housing prices can be expected to fall through the year 2011.

Sources: http://www.fhfb.gov/ and http://www.bls.gov/.



Check out the original post on AC:

http://www.associatedcontent.com/article/1471313/housing_prices_remain_high.html

The Takeaways from this article are:

• Home prices for single family homes financed by conventional mortgages remained high in 2008.


• Real home prices declined modestly for the third consecutive year, but remained high above 2000 levels.


• Conventional mortgage interest rates for 30-year, fixed-rate loans averaged 6.05 percent in 2008, but fell to 5.52 percent in December.