Home prices in the major U.S. urban markets increased in the year to October at the mildest pace in 24 months, putting a new house within reach of more Americans but also reducing the wealth effect from rising home equity.
The S&P Case-Shiller index of property values in 20 American cities rose 4.5 percent from October 2013 after rising 4.8 percent in September. Economists in the Bloomberg survey had predicted a 4.4 percent gain. Nationwide prices climbed 4.6 percent following a 4.8 percent annual increase in September. Case-Shiller data begins in January 2001.
The moderating acquisition cost for residential real estate could bring more long term purchasers into the markets, further tilting the new ownership balance from investors who have helped push up prices from the depths of the recession but whose ultimate goal is profitable resale. Recent steady job creation and the beginning of wage acceleration may spur higher rates of household formation necessary for a healthy housing market.
Payroll gains are on track to make 2014 the best year for job creation since 1999 with an average of 228,000 new hires each month though wage increases have barely bettered inflation.
From March of 2013 to April this year the double digit annual price increases in home prices averaged 12.5 percent each month far outstripping the average 2.1 percent increase in the average hourly earning.
For the period since the end of the recession in June 2009 the average monthly price rise in the Case-Shiller Index has been 0.3 percent. In the same period the average increase in hourly earnings has been just 0.2 percent.
With prices rising each month more than earning prospective buyers, particularly first time and marginal mortgage applicants, were quickly priced out of the market that at first may have looked reasonable after the steep fall in prices from the heights of the housing bubble.
New and existing home sales have slowed in recent months. Purchases of new construction fell 1.6 percent in November, a four month low, to a 438,000 annualized rate. Previously occupied homes, the largest category of home sales, sank 6.1 percent in November to 4.93 million annual units the weakest pace since May, from 5.25 million in October, .
Borrowing costs are still near record lows and, coupled with a better job market, may help draw buyers back into the market.
Rates on 30 year mortgages have been declining for more than a year since hitting 4.67 percent in September last year. The nationwide average rate on a 30-year fixed mortgage was 3.99 yesterday according to Bankrate.com. It had been 4.20 percent as recently as November 6th. The 30 year average for that standard mortgage is 5.56 percent.
The Federal Reserve has cited the wealth effect from equities and hosing as one of the justifications for its zero interest rate policy of the past six years. According to this theory rising stock and home prices make consumers feel wealthier and encourage higher rates of consumption, boosting a U.S. economy 70 percent dependent on consumer spending.
Chief Market Strategist
WorldWideMarkets Online Trading