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Seasonally Adjusted Home Prices Drop Unexpectedly

Written by Than Merrill

The U.S. housing market recovery has gained an enormous amount of traction, as is evident by the rise in home prices earlier this year. Many of the markets are well on their way to pre-recession levels. However, at least for the time being, appreciation rates appear to be slowing down. May witnessed a decline in U.S. single-family home prices, falling short of what many analysts predicted to be a slight gain. Subsequently, the S&P/Case Shiller composite index for the same period acknowledged a 0.3 percent decline in 20 of the largest metropolitan areas. The May numbers are particularly surprising when you consider that many economists forecasted a seasonally adjusted gain of at least 0.2 percent.

Contrary to what many experts thought, seasonally adjusted price predictions dropped slightly. “What I find particularly interesting is that on a seasonally adjusted basis, nationally, home prices are falling only a smidgen—three-tenths of 1 percent—but the way these markets go, that could possibly be a turning point,” Robert Shiller told CNBC in an interview on “Squawk on the Street.”

With pending home sales and new home sales down, however, “there’s some clear evidence of a weakening,” he added. Contracts to buy previously owned homes unexpectedly dropped in June.

“The market has been very strong since 2012. It’s up 27 percent since March of 2012. It’s been a huge boom,” Shiller said. “The question is what would end that boom? It might continue. This might be a little downward blip and it might continue going up, but you know, I kind of think it’s not going to go up a lot more—maybe 10 percent more—before a correction.”

According to the National Association of Realtors (NAR), three consecutive months of price gains were not enough to prevent a 1.1 percent drop in June’s pending home sales. The sector is stabilizing, but still facing several obstacles that are preventing sales from reaching their full potential, says Lawrence Yun, chief economist for the NAR.

“Activity is notably higher than earlier this year as prices have moderated and inventory levels have improved,” he says. “However, supply shortages still exist in parts of the country, wages are flat, and tight credit conditions are deterring a high number of potential buyers from fully taking advantage of lower interest rates.”

Despite the drop in seasonally adjusted home prices, Yun expects sales to increase heading into the second half of 2014.

“The good news is that price appreciation has decreased to its slowest pace since March 2012 behind much-needed increases in inventory,” Yun notes. “With rents rising 4 percent annually, potential buyers are less likely to experience sticker shock and make smart decisions on whether or not it makes sense to buy or continue renting.”

The direction of the housing sector remains optimistic, despite the absence of several prominent indicators. “The lack of income growth with potential first-time buyers is problematic,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “But this should take a turn for the better next year with faster wage growth and looser credits. If housing doesn’t re-accelerate, the economy won’t grow faster.”

The current lull in appreciation rates should prove favorable for solo investors looking to kick start their business. Now may be one of the better times to purchase a home before prices begin to increase at the rate that was previously predicted. In other words, now is not the time to wait for rates to change or prices to drop. If analysts are correct, each will increase in the near future. Take advantage of the market as it is now.