June 26, 2018

Home prices are still rising more than 6% annually, heightening affordability concerns. As home shoppers increasingly find homes unaffordable, some are re-thinking their approach. A new study from HomeAdvisor shows that many homeowners are opting to stay where they are and remodel rather than move. Half of all respondents said they are currently considering a remodel, and two out of three homeowners said they are planning to spend the same amount or more on home improvements in the next twelve months as they did in the prior twelve.

Let’s look at the new data.

Where are home prices rising the fastest? The new data for April from S&P CoreLogic Case Shiller data show that Seattle led the way with a 13.1% year-over-year price increase, followed by Las Vegas with a 12.7% increase and San Francisco with a 10.9% increase. The increases in Seattle and San Francisco are worsening already-severe affordability problems. Las Vegas, on the other hand, is a different story. Las Vegas’ housing prices are still 47% below its peak when you adjust for inflation, so the recent increase there does not represent as bad of an affordability problem as in Seattle or San Francisco.

Back to 2006/07 Peak (During the Bubble) Prices in Half of the Large Cities

It is startling to realize that home prices are back above their bubble peaks in just over half of the largest markets in the nation.

Ten of the twenty cities tracked by the Case Shiller indices are higher than their peaks; the other ten are below their high points. The National Index is also above its previous all-time high. In inflation-adjusted terms, however, only three cities — Dallas, Denver and Seattle — are above the 2006 peak.

My forecast is for home prices appreciation to slow sharply in the markets that have the most severe affordability gaps, but to slow steadily in the nation as a whole as well. I expect the rate of increase to be shaved down by a full percentage point or more next year and the year after.  In other words, look for home price appreciation rates closer to 5% in the next year or two, dipping later in the 4’s. And bear in mind: rising mortgage rates will add to the downward pressure on home price appreciation.

The S&P CoreLogic Case Shiller Index of home prices is one of the most well-respected, if not the most well-respected representation of movements in home values. It is certainly one of my favorites, because it actually looks at the same house at two different times, avoiding the apples-and-oranges problem.

The Bottom Line: High Prices and Rising Mortgage Rates Will Both Worsen the Affordability Problem

Many would-be movers are staying put just due to high home prices alone; as mortgage rates rise, even more homeowners will decide to stay in the home they already have. Otherwise, they will face a much higher monthly payment because they will have to finance at higher mortgage rates for the new home. This means that the affordability problem faced by would-be home buyers will likely get worse in the next twelve months.


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