Housing Prices Gains Cooled in January, But Analysts Aren’t Concerned

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“The housing recovery may have taken a breather due to the cold weather,” said Standard & Poor Index Committee Chairman David Blitzer in a Tuesday report, explaining the slower-than-average pace of growth for United States housing prices in the first month of the year. With residential real-estate prices increasing at a slower rate in the 12 months through January, the monthly reading of the S&P/Case-Shiller home price index of property values in the 20 largest United States metropolitan regions showed that momentum in the housing market is cooling ever so slightly. Property values rose 13.2 percent from a year ago, the smallest gain recorded since August.

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Compared to December, prices rose 0.8 percent on a seasonally adjusted basis. However, without that adjustment, prices ticked down 0.1 percent across all 20 major cities, mirroring the declines recorded in both December and November.

January’s slow pace of growth did not represent the beginning of a new trend, but rather reflected the continued impact of cold weather and increasing mortgage rates, factors that have been depressing residential property values for the past several months. U.S. home prices have posted smaller year-over-year gains in each of the past three months, and in the 12 months through December, prices gained just 13.4 percent. But economists do not see the slowdown as surprising or concerning.

“Prices are [still] rising, even though we should see those gains moderating,” Raymond James & Associates chief economist Scott Brown told Bloomberg, indicating that price gains will only continue to shrink in coming months. “You’re still talking about double-digit percentage increases,” he said, but those double-digit percentage increases “aren’t going to be sustainable over the long term.”

Prices rose in all 20 major metropolitan areas tracked by the Case-Shiller index. But in typical fashion, the western United States led the gains, with property values increasing 24.9 percent year-over-year in Las Vegas and 23.1 percent in San Francisco. Cleveland posted the smallest gain, with prices climbing just 4 percent. Despite the recent growth, housing prices in Las Vegas remain the furthest from their August 2006 peak: Property values stand at approximately 45 percent below that high. Dallas and Denver, by comparison, are now less than 1 percent away from their recent all-time index highs. Twelve cities recorded month-over-month declines.

Last year, rebounding home values helped bolster household wealth of American homeowners. Home values may still be increasing, but smaller gains in asking prices will help improve affordability. More affordable housing prices will provide support for the real-estate market, which has been an important source of strength for the economy. But higher mortgage rates will eat into affordability.

As government-owned mortgage financier Freddie Mac reported on Thursday, the average rate for a 30-year loan fell to 4.32 percent from 4.37 percent the previous week. While mortgage rates did drop last week, they have jumped about a full percentage point since touching record lows about a year ago. The yearlong increase was initially fueled by speculation that the Federal Reserve would lower its $85 billion-per-month purchases of government bonds that used to keep long-term interest rates low. Beginning January, the Federal Reserve has lowered its extraordinary stimulus by $10 billion increments on three occasions.

Because of rising  mortgage rates, the National Association of Realtors has said that affordability is less favorable than it was a year ago. But mortgage rates are not the only issue impacting demand. The industry group found in a recent survey that 20 percent of “buyers under the age of 33, the prime group of first-time buyers, delayed their purchase because of outstanding debt,” primarily student loan debt.

Comparing the latest sales of detached houses with previous sales, the Case-Shiller Index — which dates back to 2001 — is widely considered to be the most reliable measure of the housing market, but it is by no means the only gauge. Existing home sales numbers and home construction data also tell an important part of the housing market story. And in February, that story was of growth in moderation. Existing home sales decreased slightly in February to their lowest level since July 2012.

This drop mirrored January’s slowing sales pace, which was prompted by cold weather, rising home prices and mortgage rates, and low inventory. Meanwhile, new home construction also fell for a third consecutive month in February thanks to the colder-than-usual weather. New home construction may account for only a small portion of the housing market, but building has an outsized impact on the economy. Each home built creates an average of three jobs per year and generates about $90,000 in tax revenue, according to data from the homebuilders association.

Homebuilders became slightly more confident in March, an improvement that partly reflects improved demand as the spring home-selling season begins to pick up. Furthermore, as Blitzer noted, “expectations and recent data point to continued home price gains for 2014.” Most analysts do not “expect the same rapid increases we saw last year,” but “the consensus is for moderating gains,” he said.

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