Whatcom County home values continued their gradual path toward stabilizing during the summer months, according to a new federal report.

The Federal Housing Finance Agency estimates that local home values were basically flat in the third quarter, dropping about a quarter of 1 percent the past year. Between the second and third quarter, home values locally rose 1.5 percent, according to the report.

The latest numbers continue a trend of less-steep annual declines in Whatcom County. In the second quarter, the year-over-year decline was 0.9 percent; in the first quarter the decline was 1.8 percent.

Home values appreciated slightly in the Seattle metro area last quarter compared to a year earlier, which is a good sign for the rest of the state, said Glenn Crellin, associated director of research at the Runstad Center for Real Estate Studies, based at the University of Washington.

When you count transactions that include home purchases and refinance loans, Seattle's index rose 0.3 percent the past year. However, when only home sales are considered, Seattle's index rose 5.6 percent.

"The strength is clearly in the Seattle market right now," said Crellin, adding that the Seattle area tends to be the leader when the housing market improves or declines, radiating out to other communities.

One factor that's driving the Seattle housing market is a lack of inventory. The inventory of homes for sale is currently around two months; a balanced market tends to have a supply of about six months, Crellin said. With inventory so low, new home construction has started picking up again in the area.

Crellin expects the Seattle market to continue to heat up in the early part of 2013 while Whatcom County and other areas of the state will have a more gradual recovery.

He's still concerned about the backlog of distressed property across the state, but the improving market may help ease that issue. The percentage of Washington properties underwater dropped from 23 percent in the first quarter to 19 percent in the second quarter. Plus, with low inventory in areas like Seattle, there will be more demand for all property, including those in the pre-foreclosure stage.

The Housing Finance Agency uses home purchases and refinance data from Fannie Mae and Freddie Mac to come up with its all-transactions home price index for metro areas. It only uses home purchases for the state index.

In Washington, the purchase-only index increased 3.7 percent the past year, ranking it 23rd highest. Across the U.S., the purchase index rose 4 percent the past year.

Phoenix, one of the hardest-hit areas when the real estate bubble burst five years ago, had the highest rate of home appreciation among metro areas last quarter, rising 9.5 percent compared to the same period last year. Gainesville, Fla., suffered the biggest decline, down 6.7 percent.

HOME PRICES BY WASHINGTON METRO AREAS

Changes in the all-transaction home price index for Washington metro areas from the third quarter of 2012:

Area, Year-over-year change, Five-year change

Bellingham, down 0.27 percent, down 13.6 percent

Bremerton, down 4.3 percent, down 25.9 percent

Kennewick, up 1 percent, up 7.9 percent

Longview, down 1.51 percent, down 22.8 percent

Mount Vernon, down 2.3 percent, down 25 percent

Olympia, down 5.5 percent, down 23.4 percent

Seattle, up 0.3 percent, down 24 percent

Spokane, down 1 percent, down 17.2 percent

Tacoma, down 3.6 percent, down 30.5 percent

Wenatchee, down 2.2 percent, down 18 percent

Yakima, down 1.9 percent, down 4.9 percent

SOURCE: FEDERAL HOUSING FINANCE AGENCY

Reach DAVE GALLAGHER at dave.gallagher@bellinghamherald.com or call 715-2269.