Home prices continued their upward march in June, if at a slightly slower pace.
U.S single-family home prices in 20 metropolitan areas rose a seasonally-adjusted 0.9% in June from a month earlier, according to the S&P/Case-Shiller Home Price Index, after rising 1% in May.
The gain puts home prices 12.1% higher than they were a year ago, as all 20 metro areas welcomed price increases on both a monthly and annual basis, led by Las Vegas (24.9%) and San Francisco (24.5%). S&P/ Case-Shiller’s 20-city composite index also posted a 7.1% increase in the second quarter and a 10.1% increase over the past four quarters.
Yet the biggest takeaway from the new report is the fact that the pace of home price growth is showing signs of slowing down, as rising mortgage rates begin to weigh on home sales. Thirteen of the 20 cities saw their returns weaken on a monthly basis.
“Overall, the report shows that housing prices are rising but the pace may be slowing,” says David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “As we are in the middle of a seasonal buying period, we should expect to see the most gains. With interest rates rising to almost 4.6%, home buyers may be discouraged and sharp increases may be dampened.”
“I think there is a risk of a softening housing market,” warned Robert Shiller, Yale economics professor and co-creator of the Case-Shiller home price indexes, on CNBC Tuesday morning. He noted that housing has been a “speculative market” thanks to the prevalence of real estate investors that include Wall Street institutions and house flippers. Last week he warned that rising rates will hurt home prices as the increasing cost of borrowing cuts into buyer demand.
Still, news that the home price surge may be slowing isn’t necessarily unwelcome. Economists like the National Association of Realtors’ Lawrence Yun have warned that prices have been rising “too fast” and at these double-digit rates of appreciation are “unsustainable”.
Economists and real estate experts don’t expect rising rates — or any other factor of “stabilization” — to derail the housing recovery. Trulia chief economist Jed Kolko notes that home prices are still low relative to rents in every major city across the country: a 30-year fixed mortgage at a rate of 4.5% with 20% down means it is still more than a third cheaper to buy a home than rent one on average nationally. “Not every market will remain cheaper to buy but on average across the U.S., buying will stay cheaper than renting until rates reach 10.5% — a level we haven’t seen since 1990,” Kolko recently explained in an interview with FORBES.
He says the first market that will tip in favor of renting is San Jose, Calif., when rates hit 5.2%. Behind that San Francisco, New York, and Honolulu will follow, at just under 6%.
CoreLogic chief economist Mark Fleming has also crunched affordability numbers. Nationally, at the current rate of price growth versus median income growth, mortgage rates would have to hit 6.5% before housing becomes less affordable than economic fundamentals could support.