The latest readings on United States home prices are the latest confirmation of a slowdown in that area: Prices are still rising in most cities, but much more slowly than they were a few months ago. And that’s news we should cheer.
The S&P/Case-Shiller index of home prices in 20 major cities rose 0.2 percent in April, down from 1.2 percent in March and well below the 0.8 percent that analysts forecast. Over the last year, prices have risen 10.8 percent, compared with a 13.7 percent gain in the year ended in November, the recent peak. A second report on home prices out Tuesday, from the Federal Housing Finance Agency, showed the same pattern.
Just two years ago, buying a home looked to be a screaming bargain across most of the country. But the gains in home prices since then have made it a much closer call, as we reported last month. Jed Kolko, the chief economist of Trulia, writes Tuesday that national home prices are only 3 percent undervalued relative to long-term fundamentals, and that a handful of markets, particularly in Southern California, are now significantly overvalued.
This doesn’t mean that a bubble on the order of 2006 has returned, only that buyers in some of those higher-priced markets should be wary and consider renting a home instead if they are on the fence. “Orange County, today’s frothiest market,” writes Mr. Kolko, “is just 17 percent overvalued now versus being 71 percent overvalued” at the start of 2006.
Home Prices Are Still Rising, but More Slowly
Year-over-year change in S&P/Case-Shiller 20-city home price index
But that moderate potential overvaluation could easily become a major one if double-digit price increases rise too much longer. In a world where inflation is low and wages are flat, continued steep home prices increases would rapidly move the housing market from broadly balanced to unaffordable and primed for a correction in just a few months.
That’s what makes this housing recovery seem healthier and more sustainable than the bubble of the early 2000s. Then, even as home prices soared beyond any traditional level relative to income, home buyers responded by taking on more risk and buying anyway, speculating on further home price gains. This time, they seem to be looking at high valuations and not getting caught up in the excitement, instead drawing the line and paying no more than they can afford.
Home price numbers tend to move in more steady, gradual waves than other economic data. They also come out with long delays; the April Case-Shiller numbers are actually based on transactions that closed from February through April — and those home sales generally went under contract a month or two before they closed.
So the latest home price readings are very much a look in the rearview mirror, and it’s a look that suggests a deceleration is underway. The question is where it will ultimately settle. If prices were rising 13 percent in the year ended in November and 11 percent in April, what will, or should, the level be later in 2014?
The healthiest thing for the housing market would be home price rises that thread the needle: high enough that homeowners are building equity and homebuilders have incentive to start new construction, but low enough that they don’t significantly outpace wage growth and result in unaffordable housing and a painful correction. The April home price numbers suggest we may be heading there.
Source: Neil Irwin / New York Times / June 24, 2014
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