Why You Shouldn’t Worry About the Slowing Housing Market

Source: Thinkstock

The housing market has been one of the strongest pillars of the economy since the Great Recession struck the nation. Built largely by low interest rates and inventory levels, the rebound in recent years delivered impressive price gains on a regular basis. However, recent cracks in housing data are starting to rein in expectations.

Home prices are receiving a much-needed dose of reality. In August, home prices across the nation rose 5.6% on a year-over-year basis, the slowest pace since November 2012, according to the latest reading from the S&P/Case-Shiller composite index of 20 metropolitan areas. Economists expected the index to gain about 5.8%. The National Index gained only 5.1% in August, logging its eighth consecutive month of slowing price gains. In comparison, the National Index posted double-digit year-over-year gains every month from August 2013 to February 2014.

“The deceleration in home prices continues,” said David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “The Sun Belt region reported its worst annual returns since 2012, led by weakness in all three California cities — Los Angeles, San Francisco, and San Diego.” Las Vegas and Miami were the only two cities in the index to post year-over-year double-digit price gains.

Source: Census Bureau

While slowing price gains may worry some analysts, a more stable trajectory is healthier for the market in the long run. A repeat of the housing bubble is the last thing our economy needs. Furthermore, there is already strong evidence that Americans are finding housing either unaffordable or undesirable. The pending home sales index increased a meager 0.3% in September after dropping 1% in August, and homeownership rates continue to remain stuck in a multiyear downtrend.

Millions of Americans are still turning away from homeownership. According to new Census Bureau data, the homeownership rate declined to 64.4% in the third quarter, compared to 65.3% in the same quarter last year. As the chart above shows, that is the worst level since 1995. The West had the lowest rate at only 59.4%, while the Midwest had the highest at 68.8%. Homeownership rates declined across every major age group in the third quarter with the exception of 55- to 64-year-olds.

First-time homebuyers also stand to benefit from lower prices. The National Association of Realtors recently reported that the share of first-time homebuyers plunged to its lowest level since 1987 this year.

Follow Eric on Twitter @Mr_Eric_WSCS

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