Home prices rise, but for how long?

The good news: August home prices were up. The bad news: The gains are slowing, indicating that prices may have peaked. After a government shutdown in October, it’s also likely that growth – if there was any – slowed again.

The Associated Press had this story via the New York Times:

Home prices rose in August from a year earlier at the fastest pace since February 2006. But the price gains slowed in many cities from July, a sign that rising prices over the last year may have peaked.

Other reports released on Tuesday showed that consumer confidence fell sharply this month as the federal government was partly shut down for 16 days, while retail sales dipped in September. And inflation at the wholesale level was negligible.

The Standard & Poor’s/Case-Shiller 20-city home price index rose 12.8 percent over the 12 months that ended in August. That compares with 12.4 percent in July from a year earlier. All 20 cities showed year-over-year gains.

But a measure of month-over-month prices for the 20 cities rose just 1.3 percent in August. That is down from a 1.8 percent month-over-month gain in July. And 16 of the 20 cities reported more modest price increases in August than in July.

Greater demand and a tighter supply of homes for sale have helped drive prices higher over the last year. But over the summer, mortgage rates rose from their record lows. Weak job growth is also discouraging potential home buyers.

Bloomberg Businessweek reminded readers that renting is still more expense than buying, continuing to drive sales:

The news follows a less-buoyant release yesterday from the National Association of Realtors showing that pending existing home sales fell in September for the fourth straight month, which analysts attributed to rising interest rates. While that doesn’t sound optimistic, it’s still up 1.1 percent over a year earlier because housing is so cyclical. Any slowdown this fall is largely seasonal, Thomas Popik, research director for Campbell/Inside Mortgage Finance HousingPulse Tracking Survey said in a report before the NAR data was released.

HousingPulse is optimistic that, despite rising rates, the market remains “quite strong.” It says homes are selling quicker and going for closer-to-asking price than earlier this year, when rates were lower. It also points out that in September, the share of distressed properties on the market stood at a four-year low of 24.6 percent. As Trulia economist Jed Kolko reminds us, there’s another driver of demand: If you think buying is expensive, try renting.

Index creator (and Nobel Prize winner) Robert Shiller agreed that buying a home is still affordable despite the recent market gains, according to CNBC:

Home prices rose at their fastest pace in seven years in August, according to the S&P/Case-Shiller home price indexes, but one of the widely watched indexes’ creators claimed homes are still affordable, and there is no national price bubble.

“I define a bubble as a time when people have extravagant expectations, and the expectations are driving home price increases,” said Robert Shiller, Case-Shiller index co-founder and Yale University professor of economics, in an interview with CNBC. “We don’t have the mindset of earlier this century.”

Home prices are not being driven by extravagant expectations, as they were in 2005 and 2006, but by historically low inventory and strong investor demand. Sales, however, are beginning to fall off, as indicated by the latest pending home sales report from the National Association of Realtors. It showed a nearly 6 percent drop in signed contracts to buy existing homes in September from the previous month.

The Bloomberg story said borrowing costs are already starting to erode the momentum:

Higher borrowing costs are already starting to bite. Fewer Americans signed contracts to purchase existing (ETSLTOTL) homes in September, the National Association of Realtors reported yesterday. The group’s index fell 5.6 percent, the most in more than three years and the fourth straight decline.

Existing-home sales, measured when a deal closes, also fell in September for the first time in three months, the Realtors’ group reported last week. Purchases dropped 1.9 percent to a 5.29 million annual rate.

The average rate for a 30-year fixed mortgage was 4.58 percent in the week ended Aug. 22, the highest level since July 2011. It’s since fallen, averaging 4.13 percent for the week ended Oct. 24, according to Freddie Mac in McLean, Virginia.

Homebuilders and their suppliers are getting a lift from the housing recovery. Weyerhaeuser Co. (WY), a timber supplier and developer based in Federal Way, Washington, expects to close more than 1,100 homes in the last three months of this year, up about 35 percent from a year ago, President and Chief Executive Officer Doyle Simons said.

As we finish out the year and the summer home buying season slows, it’s likely these numbers will drop. It will be interesting to see the October numbers that reflect the government shutdown and what if any effect that will have on the market and confidence heading into the all important holiday buying season.