Home Prices Hit Best Level Since March 2005

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Home prices in the United States began the third quarter with more gains, but lower home affordability should not be overlooked. According to the latest Federal Housing Finance Agency report, home prices increased 1 percent on a seasonally adjusted basis in July compared to the previous month. The House Price Index has now logged 18 consecutive monthly price increases.

The FHFA index is based on single-family homes with mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. The index does not provide specific prices for homes, but the index has not posted a decline in national home prices on a monthly basis since January 2011.

In the second quarter, home prices increased 2.1 percent from the previous quarter. The FHFA’s expanded-data index — which includes transaction information from county recorder offices and the Federal Housing Administration — posted a gain of 2.4 percent for the second quarter.

Over the last four quarters, that index is up 7.5 percent. The seasonally adjusted purchase-only HPI rose 7.2 percent from a year earlier. “The housing market experienced one of its strongest quarters since the boom in the middle of the last decade,” said FHFA Principal Economist Andrew Leventis. The FHFA index is back to March 2005 levels, but still remains well below the peak made in April 2007.

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Some regions are looking more bubblicious than others. The advance in July was led by a 20.8 percent surge in the Pacific region year-over-year, which includes Hawaii, Alaska, Washington, Oregon, and California.

Prices in the Mountain region jumped 12.7 percent and the South Atlantic region gained 9.4 percent from a year earlier. The East South Central was the weakest region with a yearly gain of only 3.8 percent.

While the housing market is due to slow its impressive price gains, higher interest rates are hitting consumers. Between the beginning of May and the end of June, the average interest rate for a 30-year fixed-rate mortgage surged from 3.59 percent to 4.68 percent. According to the Mortgage Bankers Association’s latest report, for the week ended September 13, loan applications have declined for 15 of the past 19 weeks.

At least one home builder believes the rise in interest rates will not last. “The fundamentals of the current housing recovery are firmly in place, supported by low inventory levels, an improving economy and positive demographic trends,” said Jeffrey Mezger, KB Home (NYSE:KBH) CEO, in a statement. “Given these factors, we believe that the recent slower pace of the recovery caused by an uptick in mortgage interest rates is a temporary effect, and we expect to see steady upward demand for housing as consumers adjust to both higher rates and pricing.”

In morning trading, shares of home builders KB Home and DR Horton (NYSE:DHI) traded relatively flat. Home improvement names, such as Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW), also remained quiet after the housing report. Home Depot and Lowe’s have been among the best-performing names in the housing industry this year, while KB Home and DR Horton have underperformed the general market.

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