But Signs Emerge of a Leveling Off This Year
Home prices last year posted their largest annual gain since 2005, according to a report released Tuesday, but signs are emerging that price gains are leveling off.
U.S. prices rose 11.3% in the fourth quarter compared with a year earlier, according to the Standard & Poor's/Case-Shiller price index. The Case-Shiller index that measures home prices in 20 major metro areas rose 13.4% during the same span. A separate index, released Tuesday by the Federal Housing Finance Agency, said prices had gone up 7.7%, also to an eight-year high.
Rising home prices are proving to be a double-edged sword because, together with higher mortgage rates, they are reducing affordability, which has curbed sales. "Home prices will probably go up this year, but not like they've been," said Robert Shiller, the Yale University economist who co-founded the index that bears his name. "It's going to slow down." Mr. Shiller said last year's spike in mortgage rates, which jumped from around 3.5% in early May to 4.5% by June, had taken a toll on housing activity. While interest rates are "still low," the sudden increase "has offset the wild enthusiasm to buy a house that a lot of people felt in 2012," Mr. Shiller said. "We're seeing the impetus for the recent increase pulled out with the rise in mortgage rates."
Prices rebounded strongly during the past two years as low prices and rates attracted brisk demand, first from investors and later from traditional buyers who competed over a shrinking supply. Higher prices have led investors to slow their purchases in more markets, while rising rates have dented affordability for owners who need a mortgage, especially first-time buyers.
"There's no question that [the entry-level] market is not participating in the recovery as it normally has," said Ivy Zelman, chief executive of Zelman & Associates, a research firm.
Prices decreased 0.1% in December from November in the 20-city index, the second straight monthly decline. Sales tend to slow in the winter, which can lead to softer prices, but the monthly declines during the fourth quarter were still the smallest for that period in eight years.
Other recent measures of housing sales have pointed to weaker activity, which could drag on economic growth if they don't rebound during the spring selling season. Sales of previously owned homes fell by 5.1% in January from a year earlier, the National Association of Realtors reported last week. The Commerce Department is set to report Wednesday on new-home sales for January.
Real-estate executives say as housing costs rise, buyers are becoming more selective. "A house with a $1,600 mortgage payment last year now has a $2,000 mortgage payment. Buyers are saying, 'I better like it,' " said Glenn Kelman, chief executive at Redfin, a national brokerage.
Home builders during the past year have boosted profits by building more-expensive homes. Luxury builder Toll Brothers Inc. on Tuesday reported a 21% increase in its average sale price during the quarter that ended in January versus the previous-year period. But those price gains appear to be curbing sales volumes. Toll said new contracts for homes in the quarter fell 6% from a year earlier and it cut its forecast for total closings for its 2014 fiscal year by 4%.
National builder Hovnanian Enterprises Inc. began increasing certain incentives in mid-January to boost sagging sales, J. Larry Sorsby, the company's finance chief, said at an investor conference Tuesday. Incentives typically include free upgrades on home finishes or assistance with closing costs, which reduce builders' profit margins. Hovnanian said Monday that its revenue increase for the quarter ending in January would be "meaningfully lower than anticipated."
"The market's not bad—don't misunderstand what I'm saying," Mr. Sorsby said. "We're just disappointed that we're not back to last year's levels."
Tuesday's home-price report, along with other data from Zillow Inc., points to a deceleration in home prices in many of the markets that have posted the largest rebounds during the past two years. Home prices in Phoenix fell by 0.3% in December, breaking a streak of 27 consecutive monthly gains.
All 20 cities reported annual gains last year, with the largest in Las Vegas (25.5%), San Francisco (22.6%) and Los Angeles (20.3%). Those have seen the pace of increases slow since last fall.
Any moderation in home prices could ease concerns that prices were rising unsustainably fast relative to incomes. On the whole, U.S. home prices have risen 21% after hitting bottom in early 2012, according to Tuesday's Case-Shiller report. Prices, which fell 35% between 2006 and 2012, are now 21% below their previous peak and back at levels seen in mid-2004.
Home Depot Inc. HD +0.45% said Tuesday that it expects home prices to rise this year at half of last year's rate. The world's largest home-improvement retailer said "a strong recovery in housing prices" drove a fourth-quarter sales increase of 4.4%, excluding newly opened or closed stores.
"While some of the housing data has softened, we continue to believe we're in a moderate stage of recovery," Carol Tomé, Home Depot's chief financial officer, said during an investor call Tuesday.
Article curated from Wall Street Journal