Home prices keep rising, but gains slowing
(MoneyWatch) If the housing market is still sending mixed signals as it recovers from financial crisis, one thing is clear: It's getting more expensive to buy a home.
The Standard & Poor's Case-Shiller index yesterday showed home prices rose 3.2 percent in the third quarter compared with the April-to-June period and 11.2 percent year-over-year. Home prices rose 1 percent in September over October, boosting the September year-over-year increase to 13.3 percent.
While that may boost homeowners, it's not good for the housing recovery in general. Higher prices means lower affordability for prospective buyers. So it's actually a good thing these price gains likely won't continue. Ian Shepherdson, chief economist at
Pantheon Macroeconomics, points out that housing price increases are slowing
down to a more sustainable level, which many industry observers believe is helpful to the market as a whole.
In the second quarter, home prices rose at an 18.5 percent annualized rate, but that slowed to 10.3 percent in the third quarter, according to S&P/Case-Shiller's numbers. That’s about as unsustainable as home price inflation gets, and harkens back to the glory years of the housing bubble, in 2003.
Those price increases are deterring buyers from snapping up homes with the kind of fervor that they were in the spring, slowing home sales. According to numbers released Monday by the National Association of Realtors, pending home sales were down again in October, for the fifth month in a row. Pending home sales reflects contracts, not closing – but closings are expected to fall as well.
Lawrence Yun, NAR’s chief economist, said that demand for homes has been weaker than expected. “The government shutdown in the first half of last month sidelined some potential buyers,” he said in a statement. Yun added that 17 percent of realtors reported contract delays in October, mostly from waiting for IRS income verification for mortgage approval that was shut down during the shutdown.
Mortgage approvals have also been sidelined by rising interest rates, which make homes less affordable for home buyers. As of last week, 30-year mortgage rates were 4.22 percent with 0.7 percent in closing costs, according to the Mortgage Bankers of America. That's still only three quarters of a percent above the record low.
At the time, Frank Nothaft, chief economist of Freddie Mac, said fixed mortgage rates fell because of weaker economic news, including a slowdown in manufacturing growth and declines in overall inflation rates. He also noted that industrial production came in lower than expected, slipping 0.1 percent in October. Consumer prices are up about 1 percent for the year, the smallest increase since October, 2009.
Yun noted that adverse economic conditions could offset a great deal of future housing gains. “We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions,” he noted.
But the shortened week has brought some better news as well. The Census Bureau and the Department of Housing and Urban Development jointly announced that residential building permits rose 6.2 percent from September and 13.9 percent from October, 2012 to a seasonally adjusted annual rate of just over 1 million units.
Single family houses were started at an annualized rate of 620,000 units, which is still down roughly 40 percent from a more normal housing market. While we’re no longer seeing the new construction industry operating at only 20 percent, builders aren’t starting, building or selling new homes at a pace that could be called anything but anemic.
