Home values increased 0.9% in the third quarter, an annualized rate of a moderate 3.5%., according to a joint Fannie Mae, and Freddie Mac survey.

The strongest gains were recorded in the west north central region, where home prices increased at an annualized rate of 9.8%.

The West Coast and New England continue to see deterioration in home prices, however. Prices in the Pacific region fell at an annual rate of 2.8% in the third quarter, the survey found. In New England, homes lost value at a 1.6% annualized clip.

The survey, called the Conventional Mortgage Home Price index, gauges home values by looking to actual sales prices or appraised values of the same homes over time.

Data bases at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. match the street addresses of new home mortgages against previous mortgages to compare value.

"The 3.5% rate is very close to the rate of inflation. It is what home prices have been following for the better part of the decade," said Mark Zandi, chief economist at Regional Financial Associates, a consulting firm in West Chester, Pa.

"Things are vastly improved in California," he said, pointing to a stabilizing trend in home values there.

"That should be some solace to mortgage bankers. Prices are failing so that transactions can occur," he said, noting that sales are up 20% over the beginning of 1993.

Mr. Zandi did not think that falling prices are a source of concern for the credit quality of recent vintage California loans, noting that many home purchases are coming only after significant price concessions on the part of the seller, leaving the buyer with a lower basis and less room for further price erosion.

"I think it is basically a sanguine report," he said.

The survey also points to a resilient housing market, said Mark Obrinsky, an economist with Fannie Mae. "Despite the 200 basis point increase in mortgage rates this year housing demand is actually quite good."

According to Mr. Obrinsky the strong 9.8% annualized increased in the West North Central region is tied to that area's poorer performance in earlier years.

Other results of the survey:

Mountain region home prices increased by an annualized rate of 8.0% for the third quarter.

East north central home prices were up at an annualized rate of 8.6%.

Middle Atlantic home prices were basically flat in the third quarter, falling at 0.7% annualized rate.

East south central region increased 1.6%, a 6.4% annualized rate.

West south central region home prices were up by 1.0%, a 3.9% annualized rate.

South Atlantic region home prices increased by 0.5% in the third quarter, a 2% annualized rate.

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