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Home Prices Suffer Biggest Drop In 25 Years

U.S. home prices dropped the most in a quarter century in the three months to the end of September on an annualized basis as inventories, restrictive lending and a credit crunch yanked support from the market, a Freddie Mac index showed.

The Freddie Mac Conventional Mortgage Home Price Index Classic Series fell an annualized 1.3 percent last quarter, compared with appreciation of 0.5 percent in the second quarter, the No. 2 home funding company said in a statement.

Year-over-year, prices rose 1.9 percent, a sharp retreat from the 7.8 percent growth seen a year earlier, it said.

"Lenders have tightened underwriting standards, and the turbulence in the capital markets led to a spike in the cost of jumbo loans," Frank Nothaft, Freddie Mac's chief economist, said in the statement. That added to the weight on prices from house inventories at their highest since 1985, he said.

The Freddie Mac index measures all loans outside of government programs and includes data from both home purchase transactions and mortgage refinancings based on appraisals.

The index echoes trends in other widely watched measures.

The Standard & Poor's Case-Shiller National Home Price Index last month showed prices slid 4.5 percent in the third quarter from a year earlier.

Declining home prices have triggered a crisis in mortgage lending by revealing weaknesses across hundreds of thousands of loans made through the U.S. housing boom. Loans made to risky, subprime borrowers and those that required no equity from the borrower have led to soaring defaults, leading lawmakers and the Bush administration to pursue various efforts to stall resulting foreclosures.

A plan supported by Treasury Secretary Henry Paulson that aims to freeze rates on many subprime loans will do little to slow the housing downturn, analysts said.

"Many government and policy-makers feel this is a subprime problem, which is completely wrong," said Paul Miller, an analyst at Friedman Billings Ramsey, in a research note. "This is a high loan-to-value and overvalued housing problem!"

The Freddie Mac house price index showed home prices in the Pacific region posted the fastest rate of depreciation, at 3.5 percent, annualized.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.