House Prices Rise Again, but the Pace Could Slow

In 2013’s last glimpse at the housing market, figures released on Tuesday showed that home prices in major metro areas kept rising in October. Year-over-year, prices were up 13.6 percent, the biggest gain in more than seven years.

After plummeting during the housing bust, prices have increased steadily since the spring of 2012. Prices in 20 major American metro areas increased a modest 0.2 percent between September and October, without seasonal adjustment, evidence that the quick rebound in prices is slowing, according to the closely watched SP/Case-Shiller data. Higher mortgage rates might continue to slow the pace of improvement going forward, analysts say.

Nationally, the increase in home prices is moderating, the SP/Case-Shiller analysis said. Prices decreased in nine metro areas between September and October, including Denver, Chicago and Washington, whereas just one saw price decreases between August and September.

“Monthly numbers show we are living on borrowed time and the boom is fading,” said David M. Blitzer of SP Dow Jones Indices in an analysis of the new data. A big question, he said, is how quickly the Federal Reserve pulls back from its extraordinary efforts to keep rates low.

“The key economic question facing housing is the Fed’s future course to scale back quantitative easing and how this will affect mortgage rates,” Mr. Blitzer said. “Other housing data paint a mixed picture suggesting that we may be close to the peak gains in prices.” He added: “Most forecasts for home prices point to single-digit growth in 2014.”

In many metro areas where prices declined sharply — particularly those encompassing Sun Belt and Rust Belt cities like Phoenix, Las Vegas and Detroit — similarly sharp rebounds followed. But generally, prices have not touched their pre-bust heights, with prices across the country remaining about 20 percent lower, the SP/Case-Shiller data show. In Dallas and Denver, however, prices have hit new peaks, the report said.

Many economists expect price increases to moderate next year, with higher prices and higher mortgage costs making homes less affordable, even though the labor market recovery might pick up some steam and inventory might increase in some areas.

In December, the Fed said that improving economic conditions warranted the central bank starting to ease up on its stimulus efforts. The Fed said it would cut its monthly purchases of Treasury and mortgage-backed securities to $75 billion a month from $85 billion a month.

“Even after this reduction, we will be still expanding our holdings of longer-term securities at a rapid pace,” Ben S. Bernanke, the Fed chairman, said at a December news conference, his last before Janet L. Yellen takes over, pending Senate confirmation. “Our sizable and still-increasing holdings will continue to put downward pressure on longer-term interest rates, support mortgage markets, and make financial conditions more accommodative, which in turn should promote further progress in the labor market.”

But mortgage rates have risen, and the pace of sales has slowed in many metro areas. According to the National Association of Realtors, the government-backed mortgage finance company, existing-home sales dropped 4.3 percent to a seasonally adjusted annual rate of 4.9 million in November. New-home sales dropped 2.1 percent to a seasonally adjusted annual rate of 464,000, the Census Bureau said.

“While most housing markets still remain affordable, rising mortgage rates and rising house prices over the past six months are making it more challenging for the typical family to purchase a home without stretching beyond their means,” said Frank Nothaft, chief economist at Freddie Mac, in an analysis. “We expect mortgage rates to rise over the coming year, so it’s critical we start to see more job gains and income growth in the coming year.”

In some areas, limited housing supply has pushed prices high. “Home sales are hurt by higher mortgage interest rates, constrained inventory and continuing tight credit,” said Lawrence Yun of the National Association of Realtors, in an analysis. “There is a pent-up demand for both rental and owner-occupied housing as household formation will inevitably burst out, but the bottleneck is in limited housing supply, due to the slow recovery in new home construction.”

In a separate report released Tuesday, the Conference Board, a research group, said that consumer confidence jumped to 78.1 in December, from 72.0 in November, with sentiment about current economic conditions reaching its highest level since the spring of 2008. “Despite the many challenges throughout 2013, consumers are in better spirits today than when the year began,” said Lynn Franco, director of economic indicators at the Conference Board.

Many economists do expect jobs and income growth to improve, and to have a resulting effect on housing. “We expect that the improving employment picture next year will be accompanied by a sustained increase in interest rates, which in turn will roll over into the mortgage market,” said Doug Duncan, chief economist at Fannie Mae. He said the housing recovery might continue on a “modest upward trend.”

In the SP/Case-Shiller report, a survey of 10 major metro areas, as well as a broader survey of 20 major metro areas, showed year-on-year price increases of about 13.6 percent in October, the biggest such rise since early 2006.

Economists have said foreclosures and short sales are making up a smaller proportion of sales, making housing price gains look larger, since those homes can trade at steep discounts.

Article source: http://www.nytimes.com/2014/01/01/business/economy/house-prices-rise-again-but-the-pace-could-slow.html?partner=rss&emc=rss