U.S. home price gains moderate, index shows
The pace of home price gains appears to be slowing nationally, even as metropolitan markets posted strong year-over-year increases in July, according to a leading index.
Home prices rose 1.8% over June and 12.4% compared with a year earlier, according to the Standard & Poor’s/Case-Shiller index of the 20 largest U.S. cities, released Tuesday. But 15 of those cities saw monthly gains moderate from June.
“The rate of increase may have peaked,” David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a statement.
That’s welcome news for many first-time home buyers, who increasingly have been priced out of many markets. The housing recovery began last year as traditional buyers and deep-pocketed investors, including Wall Street firms, rushed into the market looking for bargains. That surge of demand created a supply shortage, particularly in Western cities.
Western cities continued to lead the price gains in July. Las Vegas saw prices skyrocket 27.5% from a year earlier. San Francisco posted a 24.8% increase, followed by Los Angeles at 20.8% and San Diego at 20.4%.
In the Los Angeles market, which includes Orange County, prices rose 2.1% in July from a month earlier, slightly slower than the 2.3% gain reached in June.
The market has cooled lately as more homes have come onto the market. Economists said higher mortgage rates have also hampered demand, helping to let some steam out of the recovery. Rates have risen more than one percentage point since May.
Home price gains should continue to moderate, settling in at a level supported by income growth, said Mark Zandi, chief economist at Moody’s Analytics.
“I just don’t think it is going to continue at the torrid pace” of this year, he said.
Others continued to predict strong price gains ahead. Patrick Newport, an economist with IHS Global Insight, called Tuesday’s data “another solid report” and noted that builders still are not finishing enough new homes to keep up with demand.
Building giants Lennar Corp. and Los Angeles’ KB Home reported Tuesday that they rode the housing recovery to strong revenue and profit gains in their fiscal third quarters ended Aug. 31.
Still, higher interest rates may have driven away some potential buyers. KB’s net orders fell 8.6% during its third quarter compared with a year earlier, and the rate of cancellations rose.
Rising rates “caught some buyers by surprise, and a few backed out of their purchases,” KB Chief Executive Jeffrey Mezger said in an earnings call with analysts.
Some shoppers are also taking longer to make a buying decision as they adjust to the new reality of higher prices and rates, Mezger said. But such decisions are “short term in nature and are fairly typical of the twist and turns housing markets experience in a recovery,” he said.
The Federal Reserve announced last week that it would maintain its massive stimulus program. Economists say that should temper rate increases, but only in the short term.
The Case-Shiller index, created by economists Karl E. Case and Robert J. Shiller, is widely considered the most reliable read on home values. The housing index compares the latest sales of detached houses with previous sales and accounts for factors such as remodeling that might affect a house’s sale price over time.
The index shows average nominal prices have reached their spring 2004 levels; that’s still 21% lower than their peak during the housing bubble in 2006.
Housing has historically led the economy out of previous recessions, and growth in the broader economy continues to rely on a robust housing recovery, Zandi said. As investors pull back because of rising prices and a decline in foreclosures, first-time buyers will have to step in, Zandi said. But many first-time buyers are hampered by rising interest rates and relatively tight lending standards.
“This recent pause in demand is a bit nerve-racking,” Zandi said. “Hopefully, it’s temporary.”
