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Home price growth is finally slowing

October 30, 2018

For some time now, home price growth has not only been outpacing historical norms at a nearly 2-to-1 rate, but the pace at which those increases come has been increasing as well. That means current owners have been getting the benefits of not only higher prices, but faster-growing higher prices, often over the course of nearly a decade. However, all good things must come to an end, and that seems to finally be the case for home price appreciation; it's not that property values are dropping, but the size of those jumps is now officially slowing down.

"Home prices saw a 4.8% increase."

The median price of single-family homes and condos across the U.S. hit $256,000 in the third quarter of 2018, up 1 percent from the end of the first half of the year, but a 4.8 percent growth on an annual basis, according to the latest U.S. Home Sales Report from ATTOM Data Solutions.

A closer look
That was the slowest pace at which home prices increased since the end of the second quarter in 2016, and continues a recent trend of declining growth, likely due to the fact that other mortgage costs have been rising for much of 2018.

"The continued slowdown in the rate of home price appreciation nationwide and in many local markets is a rational response to worsening home affordability - which has deteriorated at an accelerated pace this year due to rising mortgage rates," said Daren Blomquist, senior vice president at ATTOM Data Solutions. "Markets not experiencing this price appreciation cooldown may have more of an affordability cushion to work with, but some are in danger of overheating if home price gains continue to run hot."

With all those fast-paced increases in recent years, however, the median home price in the third quarter was up 11 percent from the pre-recession peak seen in the third quarter of 2005 ($230,000), and up 77 percent from the after-downturn lows seen in the first quarter of 2012 (just $145,000), the report said. But on a more granular basis, only 103 of the 150 major metro areas in the survey were above pre-recession peaks, meaning there were still 47 - nearly a third of all major cities - at or below those levels.

In all, the average homeowner has gained about $61,200 in property value since they purchased their homes, which should come as no surprise because the typical owner has now been in that property for more than eight years, the report said. That's a record for the survey period, which dates back to the start of 2000.

"Average mortgage monthly costs were up 15.4%."

What's the difference?
The impact of rising mortgage rates on the cost of homeownership for current shoppers and recent buyers alike cannot be overstated, however, according to new data from Zillow Research. Average mortgage monthly costs in August were up 15.4 percent on an annual basis, with owners paying an average of $118 more for a home loan payment, while home prices were only up 6.5 percent during that time.

These increases - on both fronts - have come to the improving economy, which has triggered the Federal Reserve Board to raise basis interest rates a number of times in the past few years, the report said. And while rates have remained lower than many might have expected, today they are much higher than they were even toward the end of 2016, but have been rising more rapidly since September.

With that in mind, experts note that if mortgage rate increases continue at the rate seen since the last Fed hike - 15 basis points in about a month - it could lead mortgage payments to grow by another 21 percent over the next year, the report said. And with home price growth also likely to slow over that time, there could be a further deviation in the value of homeownership. However, demand is so high right now that there likely wouldn't be too much of an adverse effect on the market for the foreseeable future.

"In the big picture, rising mortgage rates may dampen demand for housing - existing home sales dropped 1.5 percent in August - and people may spend less on other items in order to afford homes," Zillow noted. "But rates are just catching up with a robust economy, and there's no indication it will falter any time soon."

Looking at regions
Indeed, the Federal House Finance Agency noted that home prices were up 0.3 percent between July and August on a seasonally adjusted basis, according to its latest monthly data. Likewise, there was a year-over-year increase of 6.1 percent, based on data collected by the government-sponsored mortgage-backing agencies Fannie Mae and Freddie Mac.

Those increases were led, to a significant extent, by an 8.4 percent climb in home prices on an annual basis in the Mountain region, the report said. There was also a 4 percent jump in home prices in the Middle Atlantic region.

Meanwhile, many states in the Pacific and Mountain areas seem to  be getting a boost in home prices because of recent changes to national tax law, which make it far more expensive to own homes in high-tax states because local and state taxes can no longer be written off at the federal level, according to Bloomberg News. As a consequence, states neighboring California are seeing massive upticks in their real estate markets these days, in terms of both home sales and property valuation.

While prices in California are still rising at rates well above the national average, this is also true of Washington, Idaho, Nevada, Utah, Arizona and Colorado, the report said. All those states have seen prices rise at least 7 percent in the past year, while Oregon is approaching that neighborhood as well. Anecdotal evidence suggests this is largely due to how California's cost of living is driving people elsewhere; 29 percent of all home viewings in Boise, Idaho, are from current California residents.

"Eventually the laws of supply and demand are going to drive people to other parts of the country," Glenn Kelman, chief executive officer of Redfin Inc., told Bloomberg. "Boise isn't five times worse than California as a place to live. But places in California are five times more expensive."

With all this in mind, consumers have to be judicious in how they pursue home purchases. On the one hand, it's important to find a deal that is affordable based on current ability to make a down payment and credit scores, but also keep in mind that both mortgage rates and home prices are likely to rise - potentially by a large amount - over the next several months and beyond. As a consequence, it's probably a good idea to get into the market sooner than later, but that would likely only be wise for people who have already been working toward a home purchase for some time. Being able to make a purchase before the end of the year could also help homebuyers gain significant tax incentives.




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