Is There Life in the Housing Market Yet?

So far this year, data on home prices suggests that the pace of the housing recovery is slowing. Does that mean the party's over? Not necessarily - it may just be entering a new and more sustainable phase.

Understanding these trends could affect your strategy towards buying a home, not to mention the value you get out of that home in the future.

Price Gains Slow

In 2013, the average home price nationally increased by 13.38 percent, according to the 20-city composite of the S&P/Case-Shiller Home Price Indices. By May, that pace had slowed to 9.34 percent, but perhaps what is more troubling to some is that the year-over-year pace of home price gains slowed in each of the first five months of 2014.

This creates the impression of a housing recovery that has not yet come to a halt, but is certainly putting the brakes on. The question is, how much more will it slow down?

Underlying Positives

There has been a fair amount of hand-wringing over the pace of the housing recovery - most notably, in its notes after the last Federal Open Market Committee meeting, the Federal Reserve described the recovery of the housing sector as "slow," despite last year's double-digit gain in prices. However, despite the recent cooling of price gains, there is some underlying economic evidence that there may still be life in the housing market:

  • According to the Mortgage Banker's Association (MBA) applications for new home purchases rose by 2 percent in July.
  • Also according to the MBA, the seasonally-adjusted pace of new single-family home sales jumped by 12.2 percent in July.
  • Real estate research firm CoreLogic reports that the inventory of foreclosed houses on the market declined by 35 percent for the year ending June 30. This inventory, which is a drag on housing prices, has now been declining on a year-over-year basis for 32 consecutive months.
  • The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) gained ground for the third consecutive month in August. The HMI measures optimism among home builders, and the recent rally has lifted the HMI back to a level reflecting a predominant optimism among builders, after it had slipped into pessimistic territory earlier in the year.
  • According to the Bureau of Labor Statistics, employment growth has now topped 200,000 for six consecutive months. Putting people back to work is one of the surest ways of creating housing demand.

In a way, you can think of housing prices as the end product of related economic indicators like those listed above. These recent developments suggest that the ingredients are in place for continued gains in housing prices.

Putting Prices In Perspective

While housing prices may continue to gain ground, they most likely will not match the 13.38 percent pace of last year. This raises a question, though - are double-digit price increases in housing normal, or even desirable?

Looking at housing prices so far this century suggests that double-digit increase are well above normal. Since the S&P/Case Shiller Home Price Indices launched the 20-city composite in January of 2000, this composite of home prices has increased at an average annual pace of 3.8 percent. This suggests that home prices have progressed at a fairly sedate pace, but the actual experience from year to year has been anything but sedate. This composite has logged single-digit increases in only 3 out of 13 full calendar years since it was created; the rest of the time housing prices have either declined or jumped at a double-digit percentage rate.

These extremes are not desirable, because they tend to whipsaw home buyers. Fast-rising prices make homes unaffordable for some would-be buyers, while declining markets scare some buyers off. If prices settle into a pattern of single-digit annual increases, it might allow the housing market to proceed in a more orderly manner than the boom-and-bust pattern of the past decade.

Buying a Home Today

If you are buying a home, you should welcome the recent slowdown in price gains. After all, a slower market is certainly preferable to having prices run away from you. At the same time, price gains are still squarely in positive territory, and there is a series of economic indicators suggesting that they will remain so.

In short, today's home buyers should take a Goldilocks approach, and hope for a housing market that is not too hot and not too cold. The market may be settling into exactly that kind of "just right" phase.

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