Housing prices continue their path to pre-crisis levels. With 12.2% the widely watched Case-Shiller home price index showed its biggest annual increase since March 2006.
Compared to the previous month, the price for single-family homes in 20 major American cities rose in May by 2.4%. Overall the housing market continues to perform strong and is in full recovery mode.
The main reasons for the ongoing steep increase are the improving economy with a better performing job market, tight inventories and a pent-up demand, according to economist Bill Jordan with Wrightson ICAP.
Today’s ADP Employment Report said 200,000 jobs were added to the economy in July – more than in any other month this year.
After years in crisis mode many buyers are returning but the market is not ready yet to meet the demand.
Two cities stand out in the housing price index released by Standard and Poor’s. The first major metropolitan areas reaching its pre-crisis peak level are the booming towns Dallas and Denver. Overall housing prices are still 24.4% below the peak in July 2006.
Although the market shows tremendous growth rates, experts expect more to come. “There is still room for house prices to rise,” said Jennifer Lee, economist with BMO Financial Group.
The growth is unsustainable at this level but there is no immediate risk of another housing bubble. “I’m not terribly concerned about a new housing bubble as prices to disposable income, compared to longer-term averages, shows that housing is still undervalued in most regions,” said Lee.
While the announcement to cut back the Federal Reserve’s bond buying program and rising interest rates impacted markets, it is not yet reflected in this month’s Case-Shiller home price index.
The May 2013 numbers published on Tuesday are actually an average price throughout March, April and May. According to the Primary Mortgage Market Survey, the interest rates for 30-years mortgages started to rise no earlier than mid-May.
Therefore this months Case-Shiller index is mostly unaffected by the higher lending cost.
The prices for homes are still expected to rise but at a slower pace. The increasing interest rates “could contribute to some deceleration in price gains in the months ahead but probably won’t derail the uptrend,” said Jordan. Watch out for a bump in next month’s numbers.
The jump from 3.35% (May 2nd) to 4.31% (July 25th) for 30-years mortgage rates mean an increase of lending cost of nearly a third in less than three months time. Although it means quite a bit of extra costs, lending is still historically cheap. “Despite the recent back-up, 30-year mortgage rates are still near generational lows and affordability is still very favorable,” said Lee.
With a growing economy the Fed will raise interest rates in a foreseeable future. Making financing a house less affordable will eventually slow down the demand and therefore the rise in prices.