After experiencing a massive crash and a vigorous recovery, the U.S. housing market is entering a new phase of slower but steady gains.
A closely-watched index of housing prices released Tuesday showed that price increases decelerated across the country in April. Housing prices in 20 major cities rose 10.8 per cent over a year earlier, down from a 12.4-per-cent pace in March, according to figures from S&P Dow Jones Indices.
The market is cooling somewhat as would-be buyers digest the impact of higher mortgage rates and the economy fails to generate robust increases in wages for workers.
Yet many economists welcome the slowdown as evidence that the housing sector is entering a “Goldilocks” phase – not too hot and not too cold – after the torrid gains witnessed last year.
“We should be positively encouraged,” said Paul Diggle, a real estate economist at Capital Economics. “The price increases we were seeing looked quite unsustainable and potentially unhealthy.”
If prices had continued to rise at recent rates, he said, the market would have returned to bubble territory in about 18 months. More modest gains will “hopefully avoid that countrywide overvaluation, which would be planting the seeds for the next boom-bust cycle.” Over all, U.S. housing prices remain roughly 18 per cent below the peak they touched in 2006.
Other economists also saw positive signs in Tuesday’s data. Moderate price increases mean that “homeowners continue to build equity, but home purchases remain within the realm of possibility for buyers,” wrote Patrick Newport and Stephanie Karol of IHS Global Insight.
There are indications that the housing market is bouncing back from the recent battering it took over a harsh winter. Sales of new homes jumped in May to a level not seen in six years, rising 18 per cent over the previous month, the U.S. Commerce Department said Tuesday. Sales of existing homes increased 4.9 per cent in May to the highest rate since October, 2013, the National Association of Realtors said on Monday.
Still, few experts would say the housing market has repaired all the damage it sustained in the crash. “Housing is not back to normal,” said David Blitzer of S&P Dow Jones Indices in a statement on Tuesday. “First time home buyers are not back in force, and qualifying for a mortgage remains challenging.”
Some investors have suggested that there is a generational change under way in the U.S. in how people approach the housing market, arguing that younger people may never feel the allure of owning a home the way their parents did. If such predictions turn out to be true, it would be a long-term drag on the sector for years to come.
What appears to be clear is that the sprinting phase of the housing recovery is over, replaced by a longer, slower race. Earlier, price increases were driven by ultra-low mortgage rates and speculative buying by investors. Now the progress of the housing market will depend on how many jobs the economy creates and whether incomes are rising.
Housing remains broadly affordable. The interest rate on a fixed-rate 30-year mortgage now stands at 4.17 per cent, up from 3.93 per cent a year earlier, but still low by historical standards.
Home prices, meanwhile, are about 3 per cent below fair value, judging by their long-term relationship with personal income and rental rates, according to a report Tuesday from real-estate firm Trulia (by comparison, prices were 39 per cent overvalued at the height of the housing boom).
Of the 100 largest cities in the U.S., home prices remain undervalued in 76 of them, said Trulia. On the other end of the spectrum, eight of the 10 most overvalued housing markets are in California. Yet even those cities are nowhere near the kind of frothiness they demonstrated at the top of the housing market back in 2006, wrote Jed Kolko, Trulia’s chief economist.