HOUSING PRICES WERE UP IN the second quarter of 2006, but the rate of increase over the previous year went down by the sharpest amount in more than 30 years, according to the latest figures from the Office of Federal Housing Enterprise Oversight (OFHEO). Average appreciation was 1.17 percent, with an annualized appreciation rate of 4.68 percent.

Unlike other measures, which strictly record sales, OFHEO's House Price Index tracks the average house-price changes in repeat sales or refinances of the same single-family properties.

Perhaps not surprisingly, states that had experienced fast-growing price appreciation during the housing boom, such as Arizona and Florida, had the sharpest decline. Of seven states that saw prices appreciate by 80 percent or more between 2001 and 2005, only one—Rhode Island—has increased over the last year, the report said. The rest “experienced rapid deceleration.”

Still, the numbers don't suggest anything near a collapse in the housing market, says Jim Diffley, managing director of regional services for Philadelphia-based economic forecasting firm Global Insight. Some markets are going down, but the key is that the decline is slight, Diffley says. That marks a retreat from the hyperactive housing market of the past few years and a return to a more normal cycle of sales and appreciation.

“People who say the market has tanked come from a period of time when people would put a house on the market on Wednesday, and on Saturday, they'd have three offers with two of them above the asking price. That's not normal.”

However, the problem is more pronounced for new homes than in the existing-home market, Diffley notes. The problem stems from the amount of available inventory, which occurred because of the heightened demand over the past few years. “You can't fault the builders for that, but once the market started to falter, they should have backed off,” Diffley says. “Now, they need to put the brakes on a little harder.”

Diffley says that while appreciation may have declined, he doesn't anticipate a fundamental decline in house prices. As evidence, he cites the San Diego market, which was “the first to go up and the first to slow down. Construction and prices have slowed down, but prices haven't fallen. If you start to see a fire sale in San Diego, it could be a mark of what's to come.”

For the latest housing statistics, please visit BUILDER Online's Market and Data Research section.

Learn more about markets featured in this article: San Diego, CA, Philadelphia, PA.