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4 Reasons that Home Price Growth Will Slow Down

by Peter Thomas Ricci

The rapid rise in home prices has been one of 2013’s major economic stories, but there’s mounting evidence that those increases will slow down – and soon.

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If there’s been a poster child for the housing recovery, it’s been rising home prices, which have soared beyond analyst expectations and posted their strongest increases of the post-boom housing market. Just last week, in fact, we reported that prices were up 11.9 percent in the latest Home Price Index from CoreLogic – that was the 16th straight month of yearly price gains, and in the first six months of 2013, prices were up 10 percent over 2011.

Positive as those numbers are, though, will they continue for the second half of 2013? Or is there mounting evidence that though home prices will continue to grow through 2013, that they will grow at a slower rate? Here are four things to consider:

1. Housing Ain’t Undervalued – Homeownership is still quite affordable, but with interest rates rising aggressively in recent weeks and those aforementioned home price gains, housing is no longer undervalued, especially with asking rents slowing as much as they have. So rather than a housing market where homeownership is the clear, affordable option, the market is now much more balanced, so buyers may race to homes with less zeal.

2. About Those Mortgage Rates – The rapid rise in mortgage rates back in May/June created a newfound urgency in homebuyers, but now, with it being clear that the higher mortgage rates are here to stay, that urgency has largely waned. As Credit Suisse put it in a recent report quoted by The Wall Street Journal, “While agents feel some buyers have been ‘priced out,’ most think buyers are just taking a breather … The next few months will be crucial to determining whether this is just a pause or something more.”

3. Investors MIA – Though many homebuyers have entered the fray in recent months, the single-biggest driver of those home price gains was housing investors, who gobbled up cheaply priced distressed properties in record numbers. The share of distressed sales, though, has fallen dramatically the last couple months, and it’s looking like investors may have finally had their fill of housing.

4. Housing Inventory Stabilizing – The first three points all dealt with demand, that because demand has been so high, home prices were rising. However, an equally pivotal component of the rising home prices was lagging supply. With housing inventory falling by double-digits from 2012, home sellers were able to command increasingly competitive prices for their homes, and homebuyers, desperate for a good residence, begrudgingly paid the higher prices. Now, though, that scenario is changing. Local variations aside (us included!), the nation’s housing inventory is up 10 percent year-to-date, and new construction is slowly returning to form, which will create greater supply and additional competition.

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