How much have U.S. house prices fallen

Abstract

Views expressed do not necessarily reflect official positions of the Federal Reserve System. House prices in the United States were 14.1 percent lower in the first quarter of 2008 than they were a year earlier, according to a widely cited measure of U.S. house prices, the SP it also showed a more rapid decline in house prices during 2007-08. The OFHEO index tracks the sales prices of houses financed with conforming, conventional mortgages purchased by Fannie Mae and Freddie Mac. In 2007, conforming loans were limited to a maximum of $417,000. Home purchases involving larger, “jumbo” mortgages, or unconventional mortgages— including many subprime mortgages—do not influence the OFHEO index. By contrast, the SP it includes data on houses financed by jumbo mortgages, subprime mortgages, and home purchases that do not involve a mortgage. The S&P/CS index is also value weighted: More expensive homes have relatively greater influence on the index, whereas the OFHEO index is unit weighted. Further more, the S&P/CS index assigns greater weight to census regions with greater total residential real estate value. The OFHEO index, by contrast, weights regions based on the number of residential units. Hence, regions with relatively higher average home prices have more influence on the S&P/CS index than on the OFHEO index.1 The S&P/CS index exhibited faster growth in house prices before 2006 because house prices rose more rapidly in the regions with more influence on that index. These regions also tended to have a higher percentage of transactions involving mortgages ineligible for purchase by Fannie Mae and Freddie Mac. The relatively rapid decline in house prices since 2006 in the West and East Coast regions, and the relatively greater weight given these regions in the S&P/CS index help explain why the S&P/CS index shows a more rapid decline in house prices for the United States as a whole.