Could this be the start of the long-expected slowdown in home price inflation? New statistics from the federal government suggest that moderation may well be underway, especially if mortgage interest rates continue to trend upwards.

The rate of home value appreciation in the final quarter of last year dropped significantly nationwide, according to the Office of Federal Housing Enterprise Oversight (OFHEO), the agency that tracks price movements around the country. Houses appreciated at an average rate of 1.69 percent during the final three months of last year, an annualized rate of 6.7 percent. That is well below the 11.2 percent average annual rate racked up nationwide from the fourth quarter of 2003 to the same quarter of 2004, according to OFHEO's home price index.

The slowdown was especially notable in some of the hottest, high-sizzle housing markets. For example, the state of Nevada racked up a stunning 32.4 percent average rate of house price inflation from the fourth quarter of 2003 to the end of 2004. But Nevada's fourth quarter 2004 rate of gain was a cooled-down 2.9 percent -- an annualized 11.6 percent.

California's average year-to-year gain of 23.4 percent between 2003-2004 dropped to 2.7 percent in the final quarter, an annualized 10.8 percent. In historical terms that is still a strong rate of inflation, but was clearly trending downward into 2005, according to OFHEO.

The same pattern could be seen in virtually all the hot markets of 2003-2004, from Florida to Hawaii, to Maryland and Rhode Island. In Rhode Island's case, the fourth quarter gain averaged just 1.5 percent -- a 6 percent annualized rate, versus nearly 17 percent for the year as a whole.

OFHEO director Armando Falcon, Jr. said the fourth quarter numbers, released last week, "reflect a slowing of the tremendous price appreciation we've seen recently, but is still strong enough to dispel any fears of bursting "bubbles" in American housing."

Final quarter inflation rates in some of the slowest-appreciating states were anemic at best. For instance, Colorado's fourth quarter appreciation rate was just 0.5 percent -- a 2 percent annualized rate.

Among the major metropolitan markets, Las Vegas, which had a torrid 36.2 percent rate for the year as a whole, saw a big slowdown at the end of the year. Its quarterly rate was just 1.7 percent, or 6.8 percent annualized. Los Angeles went from a full-year rate of 25.2 percent to 2.7 percent for the fourth quarter, or 10.8 percent annualized. San Diego's 2 percent final quarter rate (8 percent annualized) was down sharply from its full year 24.4 percent rate.

Ditto for just about all the major markets that had experienced 15 -20 percent-plus gains from 2003 through 2004. The operative word here is slowdown. Not pop goes the housing bubble, not a net decline in prices, but a cyclical slowdown in the rate of appreciation that might -- just might -- allow household incomes a chance to begin catching up with runaway home prices.

Published: March 7, 2005

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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.