Home Prices Getting Slightly Less Insane

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Although it might not seem like it in San Francisco, the overheated housing market seems to be cooling off.

737 CaryIt’s not that home prices are falling, they are just rising at a slower pace.

On Tuesday, S&P/Case-Shiller reported that its 20-city home price index rose “only” 10.8 percent in April compared to April of last year. That was a smaller increase than the 11.6 percent analysts were expecting, and substantially lower than in previous months. All 20 metro areas except Boston saw smaller year-over-year price increases.

The rate of appreciation has been declining every month since November, when prices rose 13.7 percent year over year. In March, the increase was 12.5 percent.

Prices “are coasting back into a more normal situation,” said David Blitzer, a managing director with S&P.

The same pattern holds in the San Francisco metro area, which also includes Alameda, Contra Costa, Marin and San Mateo counties.

Year over year, prices rose 18.2 percent in April, compared to 21.2 percent in March and 25.7 percent in September.

Blitzer expects this trend to continue, in part because there has been a drop-off in corporations buying houses to rent out. He predicts that by the end of 2014, year-over-year prices increases will be in the 4 to 7 percent range.

The Case-Shiller report confirms other signs that suggest the real estate market is losing momentum.

Asking prices for homes nationwide rose 8 percent year-over-year in May, their slowest rate in 13 months in May, Trulia reported earlier this month. Asking prices tend to lead sales price by about two months, making them a good early warning signal.

“In the markets with the most extreme rebounds, there has been a clear slowdown in price gains. That is a good thing. That is happening even before we have gotten back to a housing bubble,” Trulia Chief Economist Jed Kolko said.

Despite the sharp increase in prices, Trulia estimates that homes nationwide were still undervalued by 3 percent in the second quarter of 2014, compared to 5 percent undervalued in the first quarter and 8 percent undervalued a year ago.

At their extremes, homes were 39 percent overvalued in the second quarter of 2006 and 15 percent undervalued in the fourth quarter of 2011.

To determine if a particular market is over- or under-valued, Kolko looks at factors such as its price-to-income ratio, price-to-rent ratio and prices relative to its own long-term trends.

Even though prices in San Francisco are astronomical, the market was only 6 percent overvalued relative to its long-term fundamentals in the second quarter. Nine other cities were more overvalued, including San Jose (11 percent overvalued) and Oakland (10 percent).

Stan Humphries, chief economist with Zillow, said he expects “a substantial moderation in home value growth” as the market transitions from one fueled by ultra-low interest rates and tight inventory to one fueled by household formation and income growth. Although the latter is more organic and sustainable, it’s also slower-growing than the former.

Zillow’s home-price index, which has wider geographic coverage than Case-Shiller’s, indicates that prices nationwide rose 5.4 percent in May compared to May of 2013. “Our forecast is that home pries over the next year will rise 3 percent,” Humphries said.

In the city of San Francisco alone, Patrick Carlisle of Paragon Real Estate saw no evidence of a slowdown in April or May. “This is the most ferocious spring I have ever seen,” said Carlisle, who has been tracking the market since the late 1980. “In May, 29 percent of all sales (in San Francisco) sold for 20 percent or more over asking,” he says.

“I’m seeing some signs of a slowdown in June. Inventory is starting to pick up for the first time in a long time,” he said, “and the percentage of listings under contracts is going down a little bit.’’

But the market typically slows down in June and there is no data yet for sales that closed in June.

It’s too soon to say if the June slowdown is merely seasonal or reflects “buyer exhaustion or some sort of shift in the market,” Carlisle said.

Category : Blog

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