Home Prices Gain with Room to Go

The Case-Schiller 20-City Home Price index rose year-on-year at plus 12.3 percent to reach a new recovery high. Looking at individual cities, strong gains in the west are leading the recovery. As home values increase, so to does the equity in everyone’s home. This appears to be encouraging some formerly “underwater” buyers to put their homes on the market. The resultant rise in homes-for-sale inventory threatens to slow the double digit gains in home prices; but rising inventories are also pulling more potential home-buyers into the mix.

Digging into the data for July, released on September 24, the housing sector has enjoyed 13 consecutive months of acceleration in the year-over-year growth rate since growth returned in June 2012. However, the growth rate may have peaked. Growth was either 12.2% or 12.1% in each of the previous three months as compared to the current 12.3% recovery high. Plus, year-over-year comps will get tougher as the year progresses.

Keeping this recovery theme alive, low inventories remain a source of strength for continued home price increases but we are concerned about the role of investors in the recent recovery. Cash transactions represent a high percentage of total sales. Furthermore, as “shadow inventory” is drawn into the market, further price gains won’t come easy. The data also does not reflect the impact of a recent spike in mortgage rates. The National Association of Realtors, in a downbeat outlook, sees slower sales ahead along with tight inventory and higher prices. However, the Fed’s last minute decision to continue QE3 might improve the negative outlook as rates have eased since late September.For the time being, home prices are not acting as a drag on the economy or consumer sentiment. Apparently, the Fed’s strategy to boost asset prices (including home prices) appears to be working through lower mortgage rates. We view this as confirmation of a still weak economy.