The long-predicted cooling-off of home price appreciation is underway,but there are no signs of a meltdown, according to the Office of Federal Housing Enterprise Oversight (OFHEO), the only agency that tracks the actual market valuation movements of millions of American homes.

The U.S. average appreciation rate dipped to 6.05 percent on an annualized basis during the first quarter of 2002, which is down from the 8 and 9 percent that prevailed during the first three quarters of 2001, before the Sept. 11 terrorist attacks. But 6 percent appreciation in an economy where the underlying inflation rate is well below 3 percent still represents an impressive performance for homes as capital assets.

The new OFHEO quarterly data are derived from a giant sample of over 15 million individual “repeat-sale” and refinancing transactions. All the houses in the sample have been either financed or refinanced by Fannie Mae or Freddie Mac. OFHEO’s tracking data from 185 metropolitan housing markets are closely watched by analysts in the real estate and mortgage lending fields.

The 6.05 percent national appreciation rate from the 1st quarter of 2001 to the 1st quarter of 2002 masks some red-hot local market performances that are far above that mark. For example, the top 21 highest-appreciating metro markets all have average valuation increases of 10 percent or higher on an annualized basis. Among the top 10 hottest markets in the latest survey were: Barnstable-Yarmouth, Mass. (up by 13.45 %), Santa Barbara, Calif. (up 12.5%), Ft. Lauderdale, Florida (up 11.9 %), Modesto, Calif. (up 11.87%), Miami, Florida (up 11.42%), Nassau-Suffolk on Long Island, N.Y. (up 11.37 %), Trenton, N.J. (up 10.4 %), and West Palm Beach, Florida (up 10.09 %).

On the other side of the ledger, the latest federal study documents one of the first net downturns--depreciation in the average market values of homes--seen in several years. San Jose, Calif., in the epicenter of Silicon Valley’s “tech wreck,” turned in a 3.79 percent annualized depreciation rate, according to OFHEO. San Franscisco managed to stay on the plus side--just barely. But its 1.31 percent annualized gain stands in stark contrast to its double-digit appreciation rates during the past five years.

Also at the soft end of the annualized home appreciation rate scale this past quarter, according to OFHEO, were Eugene, Oregon (up 1.66 %), Salt Lake City, Utah (up 1.94% ), Ft. Worth, Texas (up 2.21 %), Memphis, Tenn. (up 2.41 %), Albuquerque, N.M. (up 2.5 %), Salem, Oregon (up 2.51 %), and San Antonio, Texas (up 2.71 %).

Washington, D.C. continued its sizzling appreciation performance with a 11.65 percent average jump in the latest study.

What’s the outlook for home values nationwide for the balance of the year? OFHEO suggests that home prices “cannot appreciate at rates substantially greater than the general inflation rate indefinitely.”

Translation: Look for the moderate cooling trend now underway nationally to continue. But there’s little chance of a meltdown. To the contrary, in markets with solid local economies, strong employment growth and a shortage of homes for sale, don’t be surprised if values continue to boom along at double-digit rates. (The full local, state and regional data from the latest quarterly “Home Price Index” can be found at www.ofheo.gov.)

Published: June 10, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.