Real Estate & Mortgage Insights

Is the Peak of Home Price Growth Behind Us?

Home prices in August grew at the fastest year-over-year pace since February 2006, but the real price pulse of the housing market may be slowing, according to the latest data from Standard & Poor's.

The Standard & Poor's/Case-Shiller 20-city home price index jumped 12.8 percent in August from the year before. Las Vegas led the nation with a yearly price appreciation of 29.2 percent. Denver and Dallas also saw record price levels.

Yet, take a look at the monthly figures and the picture changes. Compared with July, prices were up just 1.3 percent. In July, prices had risen 1.8 percent from the previous month. San Francisco, for example, saw prices grow 0.9 percent in August, down from July's price increase of 2.2 percent. Things may well be slowing down for the foreseeable future.

"The monthly percentage changes for the 20-City composite show the peak rate of gain in home prices was last April," said David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, in a release. "Since then home prices continued to rise, but at a slower pace each month. This month 16 cities reported smaller gains in August compared to July."

Earlier this year, record low mortgage interest rates and a shorter supply of distressed properties helped increase sales and push home prices upward quickly. In the hotter markets, sellers even saw bidding wars again. In the middle of the summer, however, mortgage interest rates jumped enough to scare off many potential homebuyers, but inventory remained tight enough to keep prices moving higher.

So what happens next? Analysts say prices will continue to grow but at a moderated pace. As of the end of October, the Federal Reserve pledged to continue its current pace of mortgage-backed securities purchases for the next six weeks, which should keep mortgage interest rates fairly low through the end of the year. Low rates means more buyers can afford to jump into the market, keeping prices high if inventory doesn't increase much. But when the economy starts to show real improvement again, the Fed will be forced to raise rates to subdue inflation. Higher rates will definitely slow sales and the rate of price appreciation.

Plus, the number of foreclosures and short-sales on the market is still down dramatically from last year, making up just 24.6 percent of inventory, a four-year low. Without those discounted distressed properties bringing down the overall median home price, things could remain fairly stable going forward. Especially if no new waves of foreclosures hit the market.

While home prices will likely not fall again anytime soon, the pace of increases will probably continue to taper. Mortgage rates are predicted to rise in 2014, but forecasts for the jobs market are still sketchy. Unemployment remains too high and incomes have seen little to no increase in the past year. And let's not forget the recent government shutdown. That is bound to pull prices down for October. These factors combined will prevent prices from rising out of control as they did during the housing boom and help balance the supply of homes with the demand.

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