By Alison Rice. After increasing about 2 percent almost every quarter for two years, housing appreciation slowed significantly in 2002's third quarter. Average home prices increased just 0.9 percent between July and September, compared to a 2.4 percent rise between April and June, according to the Office of Federal Housing Enterprise Oversight (OFHEO). The federal agency releases a quarterly report on home appreciation trends, based on data provided by Freddie Mac and Fannie Mae.

While economists have expected home prices to slow for some time, the quarterly dip "was a little stronger than expected," says Celia Chen, director of housing economics for, an economic research firm in West Chester, Pa.

Chen attributes the third-quarter slip to weak consumer confidence, worries about war and the economy, and slightly higher mortgage rates that could have dampened demand for housing. That sounds like bad news for housing, but that's not necessarily the case: A slowdown in home price increases could reduce real estate bubble fears.

The national data isn't negative--yearly appreciation remains strong, with a 6.2 percent increase. But that too is slowing, according to OFHEO. The previous three quarters had seen annual appreciation in the 7 percent range, with 2001 readings hovering around 8 percent and 9 percent.

That's crucial information for builders. Rising home values in recent years have enabled many buyers to move-up and purchase more expensive homes; slowing appreciation could affect those decisions. "Normally, when the price of something goes up, people buy less of it," says Michael Carliner, an NAHB economist, who says the opposite has been occurring with housing. "They say, 'Gee, if I'd bought a house last year, look at how much money I would have made. I better buy one now.'"

Local and regional markets didn't fare quite so well, with 33 metropolitan areas and seven states registering slight price declines. Builders in the Midwest, where there's an excess supply of new and existing homes, may want to be cautious. While Midwestern buyers have been choosing new homes over old, Chen says declining home prices on existing homes could make them more competitive, price-wise, with new construction.

There are some limitations to the OFHEO data. Because it measures price changes on the same home, the index can be skewed toward fast-appreciating properties that are sold and resold more frequently. Still, "it's the best measure for local markets," Carliner says.