The long recovery in the U.S. housing market is at a new turning point as torrid gains in home prices start to give way to more tepid increases.
The sector raced ahead in 2013, driven by rock-bottom interest rates, pent-up demand and a tight supply of homes for sale.
Housing prices nationwide rose 11.3 per cent last year, the best annual result since 2005, according to closely-watched figures released Tuesday by S&P Dow Jones Indices. An index tracking prices in 20 major cities jumped 13.4 per cent in 2013.
Yet signs abound that such a performance will be difficult to repeat. Mortgage rates, while still low, have begun to rise. Cold weather has battered many parts of the country, depressing sales and construction. And demand from institutional investors, who flocked to the housing sector to snap up bargains, is slackening.
“The strongest part of the recovery in home values may be over,” said David Blitzer of S&P Dow Jones Indices in a statement Tuesday. In recent months, the data has begun to “exhibit some softness and loss of momentum,” he said, noting that the rates of growth in prices have eased slightly.
The fact that the U.S. housing market is set to decelerate from a sprint to a saunter is not necessarily bad news. Some experts worried that the rapid pace of price increases, if maintained, would catapult the sector back into bubble territory. Overall, U.S. housing prices remain roughly 20 per cent below the peak they touched in 2006.
Double-digit percentage increases in prices like the kind witnessed last year are “not sustainable,” said Paul Diggle, a real-estate economist at Capital Economics. A slower rate of growth would be “quite a welcome change.”
A rising supply of homes will rein in the housing recovery, said Mr. Diggle. The market’s recent performance is attracting would-be sellers who were previously unwilling or unable to put their properties up for sale. Developers have also kicked off of wave of new construction.
The past year was a highly profitable one for developers. On Tuesday, home builder Toll Brothers Inc. reported that profit for its first quarter ending January 31 increased more than tenfold from the same period a year earlier.
For builders, the trick is to seize today’s opportunities without repeating yesterday’s mistakes. “We must always be assessing what’s the demand and how much we should build to that demand,” said Jorge Perez, chief executive of Related Group, a major developer based in Florida. His company has incorporated new safeguards against speculative behaviour, for instance by requiring hefty deposits from buyers of its condominiums. “Our projects are still doing very, very well,” he said.
Two of the factors that sent prices rocketing higher last year – buying by investors and ultra-low mortgage rates – are less powerful now. The interest rate on a fixed-rate 30-year mortgage has increased by a full percentage point over the past year to 4.4 per cent, as the U.S. Federal Reserve opened the door to tapering its bond purchases.
Activity by investors, who snapped up properties in search of future profits, has also eased. Now “we’re starting to shift toward a [housing] recovery that will have to depend more on job growth and income growth – and that will change the rate of price increase,” noted Jed Kolko, an economist at Trulia Inc., a real estate website.
Moderate increases in home prices, however, are unlikely to rekindle the American love affair with home ownership – a relationship that some fear was irreparably damaged by the housing crash. Robert Shiller, the Nobel Prize-winning economist who helped construct the S&P Dow Jones housing indexes, said Tuesday that Americans’ expectations of future home-price appreciation have dropped dramatically.
“We’re just losing our general sense of optimism about housing,” he said on a conference call. “It’s just slowly percolating through the population.” Mr. Shiller said he expects home prices to increase roughly 5 per cent in 2014, or about half of their 2013 gains. But he also worries about a more negative scenario, where a lack of demand might actually cause prices to fall.
That worry is echoed in places such as Phoenix, which epitomized the boom-and-bust housing cycle. “We have been through enormous turbulence since 2002 and it will be a relief for many to be operating in a more balanced market,” wrote Michael Orr, who heads the Center for Real Estate Theory and Practice at Arizona State University, in a recent report on the local property outlook. But if the market cools too much over the course of 2014, he added, prices could once again turn downward.
Editor's note: Trulia Inc. is a real estate website. A story in the Report on Business on Feb. 26 incorrectly referred to the company as Trulia.com.