Home Prices Increased Again In January; Rising Rates Yet To Slow Appreciation

U.S. home prices continued to inch upward in January, rising 0.6% on a seasonally adjusted basis compared with December and rising 5.9% compared with January 2016, according to the National Index of the S&P CoreLogic Case-Shiller Indices.

Both the 10-city and 20-city composites included in the report saw home prices increase 0.9%, month over month, on an adjusted basis.

Year over year, the 10-city composite posted a 5.1% annual increase – up from 4.8% the previous month – while the 20-city composite saw a gain of 5.7%, up from 5.5% in December.

Before seasonal adjustment, the National Index posted a month-over-month gain of 0.2% in January. The 10-city composite posted a 0.3% increase, and the 20-city composite reported a 0.2% increase.

As far as the major cities go, Seattle; Portland, Ore.; and Denver reported the highest year-over-year gains. Seattle led the way with an 11.3% increase, followed by Portland with 9.7% and Denver with 9.2%.

“Housing and home prices continue on a generally positive upward trend,” says David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, in a statement. “The recent action by the Federal Reserve raising the target for the Fed funds rate by a quarter percentage point is expected to add less than a quarter percentage point to mortgage rates in the near future. Given the market’s current strength and the economy, the small increase in interest rates isn’t expected to dampen home buying. If we see three or four additional increases this year, rising mortgage rates could become a concern.

“While prices vary month to month and across the country, the national price trend has been positive since the first quarter of 2012,” Blitzer adds. “In February, the inventory of homes in the market represented 3.7 months of sales – lower than the long-term average of six months. Tight supplies and rising prices may be deterring some people from trading up to a larger house, further aggravating supplies because fewer people are selling their homes. The prices also hurt affordability, as higher prices and mortgage rates shrink the number of households that can afford to buy at current price levels. At some point, this process will force prices to level off and decline; however, we don’t appear to be there yet.”

However, Mark Fleming, chief economist for First American Mortgage Solutions, which has its own home price/affordability index, has a more optimistic view: “Reports have suggested, or surely will, that this fast pace of house price appreciation will make housing unaffordable and out of reach for many American households,” Fleming says in a statement. “Add to that more rate increases from the Federal Reserve Open Market Committee (FOMC) and the housing market will surely struggle. Not so. The 30-year, fixed-rate mortgage is currently a little over four percent, well below the historical long-run average of approximately 6.5 percent since 1990.

“In fact, we recently released a market level analysis of affordability assuming the mortgage rate was 4.75 percent,”
Fleming adds. “What did we find? Even at the higher mortgage rate, for the majority of markets a median income can purchase more than the median priced house. Why is this? The house buying power that borrowers have, even with rates below five percent, still remains historically strong. It would take a significantly higher mortgage rate to erode the real, house-buying power adjusted, price of housing. Even as nominally house prices grow at their current pace.

“So, what would be the mortgage rate that dampens demand?” he continues. “Based on our Real Estate Sentiment Index, on a national level, title agents and real estate professionals said that the mortgage rate would need to hit 5.4 percent, 1.2 percent above the current rate, before home buyers declined to enter the market. Among title agents and real estate professionals surveyed, 57 percent believe that millennial first-time home buyer demand will rise regardless of a mortgage rate increase. Rising rates are not expected to slow down demand this spring home buying season.

“It is clear that indefinite nominal price appreciation is unsustainable,” Fleming concludes. “That lesson was learned a decade ago. Now, historically high house buying power caused by low mortgage rates and economic growth set against a low inventory of homes for sale will drive a strong sellers’ market and further rising prices this spring. And it’s not, at least yet, cause for concern.”


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