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A Slowdown In Appreciation Could See Home Prices Drop

Written by Than Merrill

The rates in which home prices are appreciating have some experts fearing a subsequent bubble. However, it is important to note that factors are much different than they were at the time of the downturn. Lending practices have become increasingly stricter and interest rates remain near record lows, in association with several other factors. Regardless of the state of the housing sector, the increase in home values has turned heads. Headlines in nearly every media platform have highlighted the rate of appreciation for the better part of the last year. While prices are continuing to rise, the rate in which they are doing so is easing. Prices are still higher compared to last year, but not nearly as much as they had been. Now, suddenly, it looks as if home values could actually go negative on a national level.

“That will be the first time collectively, as a nation, we’ve seen prices drop since the low point or the trough of the housing crisis,” said Alex Villacorta, vice president of research and analytics at data firm Clear Capital.

Villacorta is quick to attribute his assumption to a 1 percent quarterly home price gain from the second to the third quarter of this year. Conversely, just one year ago, the quarterly gain was as high as three percent. While just a two percent change, the decrease could have potentially huge ramifications.

“The discouraging thing about that is, yes, we’re still in the positive, but that 1 percent has been waning from that three percent, and this comes after what should have been the most active buying season in the housing market for the summer that just ended,” he added.

With some of the largest metropolitan markets, San Diego and Los Angeles included, the West Coast has witnessed a significant decline in distressed property sales. For all intents and purposes, fewer properties are entering into the foreclosure process. Today’s numbers are a far cry from what they were in 2009, at the height of the foreclosure development. At the time, more than half of all sales in the West were of the distressed nature. Compared to today’s 12 percent, distressed sales have dropped off considerably. The decline can be attributed to investor activity. However, times are changing. Investors, consequently, are moving on to other markets in the South and Midwest, where there are still bargains to be had. The West is therefore seeing sharper drops in home price appreciation.

“And that is why the West is really that leading indicator, the canary in the coal mine, because as the West goes, both on the downturn and in the recovery, we’ve seen the rest of the country go as well,” said Villacorta.

As a result, California markets are being vastly overvalued. Southern California, in particular, is the most overvalued market in the United States. However, despite a gross overvaluation, markets in this area are expected to experience appreciation though 2015, albeit at half the rate of this year. The current rate of appreciation has economist Mark Fleming, of CoreLogic fame, skeptical. “I suppose you can never say never, but realistically there does not seem to be any particularly strong reason why we should see sustained declines in house prices,” said Fleming.

CoreLogic has released a report acknowledging that home prices have increased 6.4 percent in August from the previous year. The numbers released by CoreLogic do include the sales of distressed properties. In the summer of 2013, however, price appreciation was about twice that. Fleming says the drop in appreciation is welcome, a sign of a healthier market. “Many of those Western markets overshot equilibrium by a lot,” said Fleming. “Now we are moving toward things driving the housing market the way they used to.”

Several factors should contribute to a strengthening housing sector: demand, an improving economy, and job growth. For the time being, however, they are not. In particular, first-time homebuyers continue to be priced out of the market.

“While housing still looks affordable using conventional assumptions, we see first-time buyer housing costs approaching prior peak levels,” wrote Credit Suisse analysts in a note to investors. “The combination of higher mortgage insurance costs, higher interest rates, and higher home prices have already brought affordability back to the long-term averages for first-time home buyers.”