U.S. home prices continued their upward march in July, albeit at a slower pace, according to the latest S&P/Case-Shiller Home Price Index.
Single-family homes in the 20 major metropolitan areas tracked by the index gained 12.4% in July versus a year ago, marking the largest annual gain since February 2006, near the height of the housing bubble.
However, the monthly numbers reaffirm what June’s report hinted at: that the spike in mortgage rates has begun to weigh on the rate of growth. Seasonally adjusted, the 20-city composite grew 0.6% from a month earlier, slightly lower than economists’ expectations and at a slower pace than the 0.9% gained in June and the 1% gained in May.
“Since April 2013, all 20 cities are up month to month; however, the monthly rates of price gains have declined,” said David Blitzer, chairman of S&P Dow Jones’ Index Committee, in a release. “More cities are experiencing slow gains each month than the previous month, suggesting that the rate of increase may have peaked.”
For four consecutive months all 20 cities have clocked monthly gains. However, 15 of those cities saw the rate of those increases slow in July. Both S&P/Case-Shiller’s 10-city and 20-city composites also experienced a deceleration in price growth.
Mortgage rates have jumped more than a full percentage point since May, with the 30-year fixed mortgage averaging 4.5%, according to Freddie Mac . Rates rose thanks to investor speculation that the Federal Reserve would begin tapering its $85-billion-per-month bond buying program, better known as QE3. The resulting jump has made the cost of borrowing more expensive, causing economists keep a close watch over home sales and price growth.
Yet on Wednesday, the Federal Reserve said it would keep its bond-buying program in place — for now at least — on worries that economic growth is slowing. The announcement should keep rates from continuing to climb so dramatically in the shorterm.
“Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing,” added Blitzer. “The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing.”
Rising mortgage rates have already been arguably impacting new home sales, with activity declining 13.5% in July from June, as buyers can’t lock in on rates on homes currently under construction. It’s also created a surge in sales for previously owned homes, as those prospective buyers have jumped into transactions before the cost of borrowing becomes any more expensive. In August the pace of existing home sales hit a six-and-a-half year high, according to the National Association of Realtors.
“Amid a rising rate environment, potential home buyers rushed into the market to take advantage of record low borrowing costs. Of course looking at these figures [S&P/Cse-Shiller] today we know they are lagging by two months, giving us a look in the rear view mirror rather than a sense of what’s to come,” wrote Lindsey Piegza, chief economist of Sterne Agee, in a report on Tuesday. “This certainly is not enough to pull the rug out from under the housing recovery, but it will be enough to deter some potential buyers or result in a reduction in spending elsewhere on other goods and services.”
Others believe housing activity will slow down in the final months of 2013. NAR chief economist Lawrence Yun said last week that existing home sales may have hit a temporary peak, warning that “monthly sales are likely to be uneven in the months ahead.” And Bill McBride of the blog Calculated Risk expects “to see smaller year-over-year price increases going forward and some significant deceleration towards the end of the year.
So far the housing recovery has been led by the Southwestern and Western regions of the U.S., according to S&P/Case-Shiller’s data. Phoenix, ground-zero for the institutional investor-fueled REO-to-rental trend, has posted 22 months of consecutive monthly price gains. And another bastion of investor activity, Las Vegas, registered an annual gain of 27.5%, the largest year-over-year home price gain of any city in July.
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