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Strong House Price Growth Reflects Vibrant Housing Market

December 2, 2004

Third Quarter Appreciation Tops Twelve Percent

McLean, VA – Freddie Mac (NYSE: FRE) announced today that its quarterly Conventional Mortgage Home Price Index (CMHPI) rose 12.4 percent, on an annual basis, from the third quarter of 2003 through the third quarter of 2004, up from the prior year (third quarter of 2002 to third quarter of 2003) when the growth rate was 5.7 percent.

"The cumulative effect of two years in which 30-year fixed mortgage rates averaged just 5.8 percent and an improving employment picture this year have buoyed the housing market to new highs," said Frank Nothaft, Freddie Mac's chief economist. "The Conventional Mortgage Home Price Index (CMHPI) for the third quarter is showing strong growth primarily along the coasts – areas where populations are growing rapidly and there is little available land on which to build new homes. We are expecting national home price growth to slow next year as a result of higher interest rates; however, there is no reason to expect a decline in house prices in any area as long as job growth continues."

Nationally, home values increased by an annualized rate of almost 16 percent in the third quarter of 2004. The second quarter 2004 annualized growth rate was revised upward to 9.9 percent.

"We have seen strong numbers in all areas of the housing market this year," said Nothaft. "Sales of new and existing homes have been at record levels and should top 7.88 million units this year – an increase of nearly 10 percent over 2003's sales. In places like Las Vegas, the strong market is affecting both homes sales and rental prices. Nearly 13,000 people are moving into the Las Vegas area each month and they have to live somewhere – and they are all competing for the limited housing that is available."

For the sixth quarter in a row, the Pacific states lead the nation in annual house-price appreciation, growing at 20.9 percent. And once again, the Middle Atlantic states captured second place, with a growth rate of 16.5 percent, followed closely by the New England states, which grew at a slightly lower rate of 16.2 percent for the year. The South Atlantic states were fourth in growth with an annual appreciation rate of 14 percent.

The Mountain states came in next with an annual home-price growth rate of 10.9 percent. After the Mountain states, the West North Central states posted an increase of 8.8 percent, followed by the East North Central states with an increase of 7.6 percent. Finally, the East South Central states showed gains of 5.8 percent while the West South Central states ended the list with a 4.5 percent annual rate of growth.

"The CMHPI regional series has shown house price appreciation in every Census division for 32 consecutive quarters and since 2000 we haven't seen any notable year-over-year losses in home values in the 163 metro areas covered by the CMHPI except for San Jose, CA, which was affected by the fall of the dot.com sector and saw losses over four quarters" noted Amy Crews Cutts, Freddie Mac's deputy chief economist. "This means that the wealth-building benefits from homeownership are being enjoyed broadly across the U.S., not just among those living in the prime locations.

"The house price gains lead to the natural question of whether these gains are sustainable. Thus far, the annual growth rates are largely consistent with the market fundamentals of low interest rates, a lack of buildable land that restricts the amount of new supply hitting the market, and jobs growth. I am hesitant to use the word bubble because the fundamentals are still strong, but it is hard to believe that these very large increases will continue. However, absent significant job losses in a region – like we saw in California in the early 1990s when Los Angeles and San Diego together saw more than 575,000 jobs disappear over a period of three and a half years – house prices should not see significant declines."

"We are forecasting annual home price appreciation nationally at 8 percent in 2005," said Cutts. "Strong home sales and higher home values should propel purchase money mortgage originations to another record high next year – at around $1.52 trillion, up from 2004's estimated $1.47 trillion – but total mortgage originations will likely fall a bit due to smaller refinance volumes with the predicted rise in interest rates. Purchases of single-family houses will likely top 7.8 million units in 2004, we are expecting more than 7.6 million in combined new and existing homes sales in 2005."

The Conventional Mortgage Home Price Index shows the following regional performances:

Pacific Division (AK, CA, HI, OR, WA): increased 6.0 percent (26.5 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 20.9 percent, and during the last five years, home values have increased 76.8 percent.

Middle Atlantic Division (NJ, NY, PA): increased 5.5 percent (23.8 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 16.5 percent, and during the last five years, home values increased 65.8 percent.

New England Division (CT, MA, ME, NH, RI, VT): increased 6.0 percent (26.4 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 16.2 percent, and during the last five years, home values increased 75.7 percent.

South Atlantic Division (DC, DE, FL, GA, MD, NC, SC, VA, WV): increased 3.9 percent (16.7 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 14.0 percent, and during the last five years, home values increased 50.6 percent

Mountain Division (AZ, CO, ID, MT, NM, NV, UT, WY): increased 3.6 percent (15.3 percent, annualized) in the third quarter of 2004. In the last 12 months, home values increased 10.9 percent, and during the last five years, home values increased 36.0 percent.

West North Central Division (IA, KS, MN, MO, ND, NE, SD): increased 2.6 percent (11.0 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 8.8 percent, and during the last five years, home values increased 39.8 percent.

East North Central Division (IL, IN, MI, OH, WI): increased 2.3 percent (9.7 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 7.6 percent, and during the last five years, home values increased 31.0 percent.

East South Central Division (AL, KY, MS, TN): increased 1.8 percent (7.3 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 5.8 percent, and during the last five years, home values increased 24.2 percent.

West South Central Division (AR, LA, OK, TX): increased 0.6 percent (2.4 percent, annualized) in the third quarter of 2004. Over the last 12 months, home values increased 4.5 percent, and during the last five years, home values increased 25.6 percent.

Jointly developed by Freddie Mac and Fannie Mae and first published by Freddie Mac starting in 1994, the Conventional Mortgage Home Price Index features indexes for the nine Census divisions as well as a national index. The national index is the average of the nine divisional indexes weighted by the distribution of one-unit detached, single-family structures in each Census division.

Unlike other home price indexes based on mean or median values of homes sold during a given period, the Conventional Mortgage Home Price Index is constructed, using regression techniques, from observations of actual sales prices or appraised values of the same homes over time. The street addresses of properties that serve as collateral for mortgages funded by the two secondary mortgage market firms are first processed using software certified by the United States Postal Service to create a uniform address format and are then matched to identify consecutive transactions on the same property. There are currently 28.2 million records in the repeat-transactions database used to construct the Conventional Mortgage Home Price Index – this database includes transactions on one–unit detached and single-family townhome properties serving as collateral on loans originated through the third quarter of 2004 and purchased by Freddie Mac and Fannie Mae by October 31, 2004.
Conventional Mortgage Home Price Index
Q3 2004 Release
All Entries Are Percent Changes
New England
Middle Atlantic
South Atlantic
East South Central
West South Central
West North Central
East North Central
Mountain
Pacific
The United States
Quarterly Change
Q2 2004-Q3 2004
 
6.0
5.5
3.9
1.8
0.6
2.6
2.3
3.6
6.0
3.8
Annualized
Quarterly Change
Q2 2004-Q3 2004
 
26.4
23.8
16.7
7.3
2.4
11.0
9.7
15.3
26.5
15.9
Annual Change
Q3 2003-Q3 2004
 
16.2
16.5
14.0
5.8
4.5
8.8
7.6
10.9
20.9
12.4
5-Year Change
Q3 1999-Q3 2004
 
75.7
65.8
50.6
24.2
25.6
39.8
31.0
36.0
76.8
47.0
Annualized
5-Year Change
Q3 1999-Q3 2004
 
11.9
10.6
8.5
4.4
4.7
6.9
5.5
6.3
12.1
8.0

Source: Freddie Mac



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