Real Estate & Mortgage Insights

Home Prices Jump by Record Margins, but Are They Sustainable?

U.S. home prices rose at the fastest rate in over seven years in May, according to the latest S&P/Case-Shiller index, with two cities even posting all-time highs. But with mortgage interest rates increasing, are we likely to see these price gains stick around?

The S&P's 20-city index – comprising the nation's largest 20 metropolitan areas – jumped 12.2 percent in May from the previous year, the biggest increase since March 2006. Compared with April of this year, prices were up 2.4 percent. Dallas and Denver home prices rose to their highest levels on record since 2000, surpassing even their housing boom highs.

Among the 20 cities, San Francisco saw the biggest yearly jump, with home prices there climbing 24.5 percent on a seasonally adjusted basis from May 2012. Las Vegas was a close second with a 23.3 percent gain and Phoenix was third with a 20.6 percent gain. At the other end, the very bottom of the pack was New York where prices grew just 3.3 percent in the past year.

"Home prices continue to strengthen," says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. "Two cities set new highs, surpassing their pre-crisis levels and five cities -- Atlanta, Chicago, San Diego, San Francisco and Seattle -- posted monthly gains of over three percent, also a first time event.” He added, "the overall report points to some shifts among various markets: Washington DC is no longer the standout leader and the eastern Sunbelt cities, Miami and Tampa, are lagging behind their western counterparts."

With even the worst performing areas still seeing monthly price increases and the national averages back up to their spring 2004 prices, will the housing market continue to move upward with such force in the coming weeks? Here's what the experts have to say about it:

Zillow senior economist Svenja Gudell says the double digit price jumps from the past three months is “not normal, not sustainable and, frankly, not very believable.” She forecasted that “a combination of rising mortgage interest rates, flagging investor demand and more inventory entering the market will all help to moderate the pace of home value appreciation and stabilize the market.”

"Rising mortgage rates and increased inventory started to take the edge off of home price growth in May, a clear sign that housing market is headed toward a more balanced chapter," said Ellen Haberle, economist at Redfin, a national real estate brokerage, echoing Gudell's comments. "We expect that higher mortgage rates, growing inventory levels, and seasonal relaxations of home demand will continue to moderate home price growth over the next quarter."

Celia Chen, senior director of housing economics at Moody's Analytics in West Chester, Pennsylvania agrees that the current pace cannot continue if rates keep rising, but believes that the market fundamentals are still strong. "There is probably going to be a depressing effect from higher mortgage rates, but it will not be enough downward pressure to keep the housing market from expanding.”

Mark Palim, a vice president in the Economic and Strategic Research Group at Fannie Mae says we have very little reason to worry at all about the inclining rates. “History suggests that interest rate increases at the level recently witnessed will not stop the current housing recovery,” he wrote in a research commentary. “In addition, history shows that a rapid rise in interest rates tends to have little correlation with home prices.”

So while there is no consensus on whether home prices will continue their breakneck, upward run, until inventory catches up with demand or interest rates spike quickly, prices will keep increasing.



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