What’s Happening in Housing?

The breakneck pace of home price growth from earlier this year appears to be slowing—and that’s not necessarily bad news if you are still looking for a home.

first-time-home-buyer-nj

Home prices in June rose by 11.9% from a year ago, essentially unchanged from the year-over-year gain posted in May 2013.  On a seasonally adjusted basis, prices in June went up by 0.6% from May, according to Capital Economics, the smallest gain in six months.

A pullback in home prices isn’t a major cause of concern for you, because prices are still going to rise—just not at as brisk a pace as you’ve seen over the past year.  You shouldn’t fret over what seems to be an enormous increase.  The opportunity for you to land a great deal is still very much a reality.

A report published last week from economists at Goldman Sachs Group offers three reasons why home price gains are likely to moderate:

 meat piece graph 1 Looking at the National Chart in hindsight, it is easy to see the “housing bubble” and the return to rational valuations.

First, housing is no longer that cheap. Home prices relative to incomes and relative to rents no longer look “undervalued” as they did over the past two years. Instead, recent home-price gains have put home prices on a national basis back close to “fair value.”

 meat piece graph 2 Although home prices are up from their lows, they are still a great value by historical standards.

Second, a sharp spike in mortgage rates has probably led some buyers to pause. A monthly survey of real-estate agents suggested that the “initial urgency” sparked by the jump in mortgage rates from June had subsided, “and now buyers are stepping back to re-evaluate their options,” the report said. “While agents feel some buyers have been ‘priced out,’ most think buyers are just taking a breather.”

meat piece graph 3 Third, some of the biggest drivers of price gains are going to play a smaller role going forward. Home price indexes have posted sharp increases in part because the share of homes selling out of foreclosure has declined. The “distressed sales” share has fallen so far that it can’t drop much lower. Investors are also slowing down their purchases in part because the bargains of yesteryear have dried up.

Rising home prices are also encouraging more sellers to test the market, putting an end to the steep inventory declines witnessed over the past two years. The number of new listings that hit the market between mid-June and mid-July in 24 metros increased by 14% compared with than the same period last year—the strongest year-over-year growth in listings so far this year.

Home prices relative to incomes and relative to rents no longer look “as undervalued” as they did over the past two years.  Instead, recent home-price gains have put home prices on a national basis back at “fair market value.”

Rising home prices are also encouraging more sellers to enter the market, which means more options when you decide to buy a new home.  There was an increase of 14% compared with than the same period last year—the strongest year-over-year growth in listings so far this year.  Normally, inventory declines between May and July, but that hasn’t been the case this year.  If you have an urge to wait, it may be unfounded since great deals are still out there.

While this should help improve supply-demand imbalances, it’s possible that many of these sellers will be in the market for another house, meaning that prices will continue to rise until there’s more new construction available.  With the improving underlying housing demand driven by household formation and economic recovery, we think housing activity will remain on an upward trajectory despite occasional ups and downs along the way.  You should search for a home with confidence as you still are in a market that welcomes new buyers at great deals.

Source: Wall Street Journal

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