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The widely watched S&P/Case-Shiller Home Price Index released on Wednesday showed home prices declining 14% from the same period last year. These are scary numbers for both homeowners and lenders. Why are some financial institutions gearing up home equity and mortgage lending in the face of this negative trend? Precision targeting is the key.

The headlines were all about the year over year number. “Drop in Home Prices Accelerates” (Wall Street Journal);  “Housing market just gets uglier” (USA Today). Here’s the graph that made the news (click on graph to expand).

home price monthly price variance

But this is only part of the story. First of all, every market is different. Charlotte and Dallas showed gains. Miami, Las Vegas, Phoenix and most California markets showed large declines. Even in cities with declines, not every neighborhood performed the same.

In the face of this uncertainty, why are some lenders expanding their home lending programs? Jay Zhang, who directs marketing analysis at JP Morgan Chase, discussed these opportunities in a recent conference presentation (see our post) — in a nutshell, it’s all about improving analytical abilities to find the leverage points.

San Diego, a market with large price declines, offers an instructive example. As the graph below illustrates (click on image to expand), home prices grew at about a 5% annual rate from 1987-2000, then rocketed up at a 17% annualized rate until peaking in the second quarter of 2006. This growth rate was not sustainable, and was bound to correct to something closer to the historical mean.

San Diego home price trends

Where can lenders find solace in these numbers? Prices are still over 60% higher than in 2000, despite the recent declines. So while some homeowners have clearly lost equity, others — especially those who have owned their home over 4 years — are in the black.

Chase, and other larger lenders, are using the data to identify markets, neighborhoods, and even individual homeowners where there are opportunities for profitable and lower risk home equity lending.

In this tough market, success lies in precise targeting to identify opportunities, and then closely managing sales and marketing resources to optimize performance.

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