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U.S. home price index posts largest drop in 17-year history

By Sherman Ragland | May 26, 2008

WASHINGTON — A home-price index considered to be the most comprehensive reading of the United States market posted the sharpest quarterly decline in its 17-year history, and analysts say housing has yet to bottom out.

Rapidly falling home prices in California, Florida and Nevada skewed the national results.

The U.S. Office of Federal Housing Enterprise Oversight said Thursday that home prices fell 3.1 per cent in the first quarter compared with last year.

It was only the second quarter of price declines since the index started in January 1991. The price index first declined on a year-over-year basis in the final quarter of 2007, when it dropped 0.45 per cent.

Another widely followed reading, the Standard & Poor’s/Case-Shiller index, has shown larger declines for major U.S. metropolitan areas. But analysts say the government index provides a more comprehensive reading of nationwide housing market.

That’s particularly true for midwestern states, where prices never skyrocketed and have been less affected by the real estate downturn.

“Most people don’t live in a Miami condo,” said Michael Englund, chief economist with Action Economics in Boulder, Colo.

Still, declines in the government index, which focuses on less expensive properties and includes fewer houses bought with risky home loans that have gone sour over the past year, show the depth of the housing market’s troubles.

Prices fell in 43 states, with California and Nevada showing the biggest declines. Home prices dropped by more than eight per cent in those states.

The government index also fell 1.7 per cent from the fourth quarter of 2007 to the first quarter of 2008, the largest quarterly price drop on record.

“The large overhang of real estate inventory awaiting sale continues to force price declines in many areas, but particularly in places that had seen very sharp appreciation,” Patrick Lawler, the agency’s chief economist, said in a prepared statement.

The government index is calculated by tracking mortgage loans of US$417,000 or less that are bought or backed by the government-sponsored mortgage-finance companies Fannie Mae and Freddie Mac.

Wall Street analysts have tended to focus on the S&P index, an update of which is due next Tuesday, as a way to measure the value of securities backed by subprime mortgages and loans to borrowers in big metropolitan areas.

Earlier this month, economic forecasters surveyed by the Federal Reserve Bank of Philadelphia projected the government index would show a 5.4 per cent annual decline in the fourth quarter of 2008. The survey projected the reading would not recover until early 2009.

Despite this National trend, home prices in “select pockets” across the country, such as inside the Beltway in Washington, DC, continue to rise.

One thing to note, in even the worst markets in the country, such as Calfironia, Las Vegas and South Florida, the drop in home prices has still not come close to the worst single day losses which occur in the stock market every 7-10 years, nor do they come close to the performance of the NASDAQ during the “Dot com” bust.

In short, these current drops in prices have created the single biggest buying opportunity for real estate investors in over 27 years, if you know how to put the deals together…

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