The Re-Explosion of U.S. House Prices Is Overby
Call off the bubble alert. Through 2012 and 2013, U.S. house prices were rising at a pace that was as extreme as anything seen during the disastrous housing bubble of the last decade. But since the start of 2014, the pace of increase has slowed markedly. Assuming the slower pace sticks—and it looks as if it will—prices will remain affordable, if not exactly cheap. “That means that the housing market will avoid becoming overvalued, allowing the recovery in sales activity and housing starts to continue,” Capital Economics property analyst Paul Diggle said in a research note today.
The latest evidence of slowing comes from CoreLogic, which announced today (PDF) that prices in May were up 8.8 percent from a year earlier. That’s still a big gain, but CoreLogic Chief Economist Mark Fleming notes in a report that it’s almost 3 percentage points lower than the growth rate seen three months earlier, and it’s the lowest annual change in 18 months.
Look for the rate of increase to continue declining in the months ahead, as more housing inventory comes onto the market. “We are still under-building compared to population growth,” homebuilding analyst Stephen Kim of Barclays wrote in a recent report. From a low of 554,000 in 2009, annual housing starts reached 927,000 last year, and Barclays predicts they will rise by 200,000 annually, reaching 1.7 million by 2017.
The housing market is fundamentally sounder than it has been in years. The number of homes entering foreclosure per quarter is back down to the pre-crisis levels of 2005-2006, notes Torsten Slok, chief international economist of Deutsche Bank Securities. Distressed home sales accounted for only 11 percent of sales in May, down from 18 percent a year earlier.
The strengthening economy helps, too. History shows that the housing is more sensitive to the health of the job market than to interest rates–meaning that if people are confident about their jobs they will buy, even if mortgage rates are up.
Bottom line: Capital Economics looks for home prices to rise 7 percent this year and 4 percent in 2015. CoreLogic predicts prices will rise 6 percent from May 2014 through May 2015. Barclays predicts home prices will rise 5 percent this year, 3 percent in 2015, and 2 percent in 2016.
New-home prices have risen faster than existing-home prices, so they’re more vulnerable to a correction. Barclays’ Kim has gone so far as to predict that new-home prices will decline a bit in 2016, a call that he concedes is controversial. New houses always command a premium over “used” houses, but from 1968 through 2008 the differential was about only 15 percent. By last year, the median new single-family house was 38 percent more expensive than the median existing single-family house. That gap is unsustainable and will shrink, Kim predicts. Barclays looks for new home prices to rise just 4 percent this year, stay flat in 2015, and fall 2 percent in 2016. Existing home prices will catch up, Barclays predicts, with gains of roughly 7 percent this year, 4 percent in 2015, and 3 percent in 2016.