House prices continued their downward trend in the fourth quarter of 2010. The Federal Housing Finance Agency (FHFA) release of their purchase-only house price index (HPI) indicates that house prices fell a further 0.8% to a seasonally adjusted index value of 188.4 in the fourth quarter of 2010 (down 2.2% to 187.7 NSA).  This follows a 1.8% decline (both SA and NSA) in the third quarter.  On a year-over-year basis, house prices are down 3.9% (NSA) from fourth quarter 2009 to fourth quarter 2010.  The month-over-month National HPI was down 0.3% in December to a seasonally adjusted index value of 188.4 (down 2.2% NSA to 187.7), with the no change (⁺0.0%) in November revised to a 0.3% decline. 

A month-over-month decline was observed in seven of the nine Census Divisions. The largest declines were in the East North Central (-1.2% SA), West South Central (-1.1%) and Pacific (-0.8%) divisions.  An increase of 3.0% was observed in the Mountain division, while there was no change in the West North Central division. Year-over-year the HPI was down in all divisions, with the largest declines in the Mountain (-5.6%), Pacific (-5.4%) and South Atlantic (-3.8%) divisions. These divisions are dominated by states that had the biggest bubbles (Nevada, Arizona, California and Florida), so the large declines are no surprise.

The rate of change in house prices varies widely across the states, with prices rising in 16 states on a quarter-over-quarter basis.  The largest quarter-over-quarter increases were observed in Delaware (+4.5% SA), Colorado (+1.8%), Maryland (+1.6%) and North Dakota (+1.6%). States with the largest declines, included Idaho (-6.1%), Arizona (-4.5%), Georgia (-3.8%), Missouri (-3.5%), Oregon (-3.3%), and Alabama (-3.2%).

The recent declines in house prices are being driven by the high rate of foreclosures and distressed sales.  However, the situation is beginning to show signs of easing. The Mortgage Bankers Association indicates that the number of delinquent mortgages has been falling over the past year, and rate of foreclosures started shifted lower in the fourth quarter.  A steady decline in foreclosures will lower the share of distressed sales and reduce the downward pressure these mortgages are exerting on house prices. This, in combination with improving housing demand (the National Association of Realtors indicating that existing home sales have risen almost 40% in the past six months), is expected to stem further declines in house prices.