We took a look at the recent release of the Case-Shiller Seattle index and the OFHEO Pacific index, as well as the implications for first time homebuyers.

A quick explanation, the Case-Shiller index essentially measures all housing prices (subprime, conforming, and Jumbo) in 30 geographic markets in the U.S. Seattle is one of those markets. The OFHEO index (Office of Federal Housing Oversight), on the other hand, measures a wider geographic range, dividing the data between East North Central U.S., Middle Atlantic, etc, rather than specific cities, like Seattle. The other critical difference between the two indexes is that the OFHEO index measures only conforming loans from Fannie Mae and Freddie Mac. The methodologies of the two indices are essentially the same, but they measure different variables.

The latter distinction is critical, because the segment of the real estate market that has been hardest hit is the part of the market that was articificially inflated with the use of the new derivative related loans: subprime, Alt-A, Jumbo.

February 1991 to June 2004 Growth Trend Line: 4.50%…We are using this time period because this is when the data began for the OFHEO index. The Case-Shiller data goes back an additional year, but using February 1991 allows us to use the same time period for both Case-Shiller and OFHEO.

Growth Rates During The Bubble: 2004 to 2007Case-Shiller Seattle Index: 11.52% annualized (Begin June 2004, Peak July 2007)

OFHEO Pacific Index: 9.95% annualized (Begin June 2004, Peak April 2007)

Current Status:

For the price data through March 2008, the two indexes are both still above the 4.5% long term price trend, with the OFEHO Index further along in the correction process (closer to the long term growth line). As of the March 2008 data (published in late May 2008) the OFHEO index is 7.19% above the long term Non Profit Growth trend line, while the Case-Shiller index is still 28.13% above the trendline.

Our reading of the data is that the Jumbo market in the Seattle Area is due for a continuation of the correction it has experienced. Given the current financing alternatives available, including the new expanded conforming loans (in the Seattle market this amount is $567,500), I would define the Seattle Jumbo Home market as those homes selling for $620,000 and above. This is the price range we expect to see the greatest deterioration in prices moving forward.

However, keep in mind, another major part of the equation that we have not addressed in this article, is housing affordability. As interest rates rise and the probability of rising unemployment at least through 2009, housing becomes less affordable, which would act to further dampen home prices in the Seattle market.

First Time Home Buyer Implications:

For First Time Home Buyers in the Seattle market, however, the implications are considerably different. Assuming that a FTHB is using an FHA loan, with the current allowance of 3% gifting from a non-profit organization paid by the seller, with 6% closing allowance paid by the seller, this 9% total allowance in closing costs more than compensates for the 7.19% OFHEO Pacific index is above long term trend.

Given the fact that the Senate appears poised to eliminate the 3% Gift provision from non-profit organizations such as Nehemiah, AmeriDream, etc. I would suggest that now is actually very rational time for a first time homebuyer to be considering a home purchase.

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