The recent S&P Case-Shiller Home Price Indices revealed a leveling of home prices in July. Gains are continuing, but at a slower pace. 19 of the cities in the 20-city survey showed declines in the growth rate, with only Miami showing a slight uptick.
The national seasonally adjusted growth in home prices in July was 0.2% over June’s prices, and 5.6% year-over-year compared to 6.3% in June’s year-over-year reading. This is logically consistent with most of the other recent housing data on home sales and new housing starts.
Is this good news, bad news, or somewhere between the two?
Overall, this is good news. Growth is important, but unsustainable and irrational growth leads to irrational housing booms, which lead to irrational housing busts. Mark Fleming, Chief Economist with CoreLogic (the owner of Case-Shiller), noted that the year-over year price peak was approaching 12% last October and has since slowed down toward the more reasonable 6% range.
Fleming added that this leveling out of the home appreciation rate was “…a welcomed sign of more balanced real estate markets, and (will result in) less pressure on affordability for potential homebuyers in the near future.”
That sums up the best component of the news. With wages still stubbornly stagnant and mortgage credit still relatively tight through the reforms of the past few years, middle-class homebuyers are having a difficult time saving up for homes. This is part of the reason that home sales have gone through several false starts in the recovery phase.
A good stable rate of growth keeps appreciation ahead of inflation while keeping home prices within the reach of potential buyers, especially those looking for starters and more moderately priced homes. Without sufficient demand for starter homes due to poor affordability, those looking to move up cannot afford to put their home on the market, causing a chain reaction through the housing market.
Fortunately, housing market professionals are generally expecting growth to continue at a more stable pace, perhaps somewhat lower than the current rate. Property Economist Paul Diggle with Capital Economics expects the supply in available homes to increase, dropping the Case-Shiller reading to 4% by the end of 2014. Bill Banfield of Quicken Loans agrees, adding, “Slow but steady is this year’s theme when it comes to home price increases.”
One group that is less happy about the growth rate is underwater homeowners who are having a harder time getting out from under during times of slow growth. Rapid appreciation of their homes can bring the home values “above water” (rising above the amount that is still owed on the home), and can give the homeowner the opportunity to refinance at a favorable rate.
Refinancing is not easy, because, as mentioned earlier, credit is still quite tight – as even Ben Bernanke found out recently when he was unable to secure refinancing on his own home. If you tack on the burden of being underwater on your mortgage, it is even more difficult.
So the news is overall pretty good – but is it really likely to continue? Those in the housing market are betting – and hoping – that it will. However, given the current concerns about overvaluation of the stock market and potential geopolitical shocks, it may not take much to derail the economy in the short-term, and drag housing down along with it.
Let’s hope that the housing stability extends to the stock market – and, for that matter, that stability extends to the world stage. Goodness knows the world could use it.