The best part of the housing price recovery may be over


The spectacular gain in home prices during the past two years is showing signs of leveling off, with month-to-month increases slowing down, according to a closely-watched index released Tuesday.

The Standard & Poor’s/Case-Shiller index shows that home prices last year posted the largest increase since 2005, rising 11.3 percent nationally in the fourth quarter from the same period a year earlier. Even more impressive gains were made when gauging prices in major metropolitan areas, including a 13.4 percent year-over-year increase in the 20-city index. Overall, average home prices are back to their mid-2004 levels.

But the stellar performance may not last, according to the economists who released the results. The higher prices, combined with a rise in mortgage rates, have pushed some potential buyers, including investors, out of the market. That in turn has dampened demand, and the effects are starting to show in the index’s month-to-month figures.

Of the 20 metro areas tracked in the report, prices were down in 11 cities from November to December. Among them was Phoenix, which posted a 0.3 percent decline after 26 months of back-to-back gains. It was that area’s largest drop since March 2011.

There were slight gains in nearly every other area, including Washington, where prices rose 0.2 percent. Prices were flat in Atlanta and Detroit. Overall, the 20-city composite was down in December by 0.1 percent, its second monthly decline.

David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a call to repporters that the “strongest part of the recovery in home values may be over.” The monthly gains, he said, have “faded out, and we’re seeing a loss in momentum.”

Robert Shiller, the Yale University economics professor who helped devise the index,  agreed. “We might actually see falling prices by the end of 2014,” Shiller said during the call. “I’m not predicting that. I’m just saying it’s a worry.”

Experts who track the industry say the declines won’t be devastating. Many expect more moderate single-digit growth in prices in the year ahead, with the biggest increases in urban centers with a tight supply of homes.

In fact, the moderation may be a healthy thing, many real estate industry observers said.  The rise in prices was largely fueled by real estate investors who snapped up cheap properties when the market soured, fixed them up, and rented them out at lucrative rates.

The flurry of investor purchases put a floor on the prices, and helped “underwater” borrowers who owed more on their mortgages than their homes were worth, said Mike Larson, an analyst at Weiss Research. But the double-digit gains are unsustainable.

“We’ve gotten ahead of ourselves in terms of price growth and partially as a result of investor buying,” Larson said. “The regular buyer needs to catch up. We’ve seen what happens when you have runaway price growth and real buyers can’t afford housing.”

In the Case-Shiller index, which measures repeat sales of single-family homes, some of the most dramatic year-over-year price growth took place in regions that were hardest hit during the housing meltdown. Topping the list was the Las Vegas area, a hotbed for speculators during the housing boom. It showed a 25.5 percent annual gain.

Sam Bullard, a senior economist at Wells Fargo, said that even with the huge leap, Las Vegas remains 45 percent below its pre-recession peak. For such markets, bringing them back to health is a delicate balancing act, Bullard said.

“We want prices to rise high enough so that fewer peopel are underwater on their mortgages,” Bullard said. “But not so high that it shuts people out of the market and brings back speculation.”

Dina ElBoghdady covers housing policy for The Washington Post.
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