Correction: A previous version of this story incorrectly indicated that new regulations require mortgage lenders to ensure no more than 43 percent of borrowers’ income is used to pay down debt. The regulations do not force companies to follow this standard, but many lenders are expected to do so. This version has been corrected.
Home prices jumped over the past year, according to a new report, but worries are growing over whether the housing market is fading as a bright spot in the economy’s murky recovery.
The S&P/Case-Shiller index of home prices in 20 U.S. cities on Tuesday rose 13.3 percent in September from the same month last year and ticked up 0.7 percent from August. But the pace of growth slowed in many places.
Those gains are also a double-edged sword. Rising values are essential for the approximately 7 million Americans whose mortgages are larger than their homes are worth. But housing affordability has suffered as a result, just as interest rates have moved significantly higher.
New regulations slated to take effect in January could also make it more difficult for many potential home buyers to qualify for a loan.
“It’s pretty clear that the recovery in home sales has at least stalled,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
Real estate had been a source of strength for the nation’s economy after spending years in the rubble of the financial crisis.
The housing market was ground zero for the dangerous combination of insatiable demand and shady lending that triggered the country’s financial crash. Many economists believe the recovery will not be sustainable until the sector is fully healed.
Analysts had predicted that rising home prices, record-low mortgage rates and growing consumer demand would galvanize the industry, rebuilding household wealth and creating new jobs.
The housing market has made significant progress since bottoming out in 2009. The S&P/Case-Shiller index showed that home values are now on par with prices in 2004. The number of homes lost to foreclosure dropped 39 percent in September compared with a year ago, according to CoreLogic. Owners are increasingly paying their mortgages on time. In the Washington region, prices gained 7 percent in September from a year ago.
But other data released this week showed the sector is losing some of its luster. Contracts to buy existing homes fell for the fifth straight month in October.
Many analysts blame this on the rise in mortgage rates. Their unexpected climb began in late spring and undermined the real estate market’s strength. From March to September, the average rate on a 30-year fixed loan shot up a percentage point, to nearly 4.5 percent. Rates have since eased back down to 4.2 percent, but analysts say it is unlikely they will return to last year’s rock-
“Home buyers are trying to digest that,” said Scott Anderson, chief economist at Bank of the West. “That has sucked some of the momentum out of the housing recovery, no doubt about it.”
The run-up in rates was due in large part to Federal Reserve policies. The central bank helped push down long-term interest rates by buying $85 billion a month in government bonds and mortgage-backed securities. But officials began suggesting in the spring that the economy could soon be strong enough for them to begin winding down that program.
The prospect spooked investors, sending stock markets plunging and bond yields soaring — pushing up interest rates in the process.
“Everything hinges on the ability of the Fed to manage long-term rates higher," said Mark Zandi, chief economist at Moody’s Analytics. “If they’re not able to manage that, then the recovery is going to be disappointing.”
The rapid increase in mortgage rates not only dampened enthusiasm among traditional home buyers, but it also turned away real estate investors who are often the primary bidders in hard-hit neighborhoods. The declining stock of distressed properties combined with higher rates has made real estate a less attractive proposition for both institutional and mom-and-pop investors. In addition, the increase in rates choked off the refinancing business.
The Fed has since attempted to walk back some of its statements. Chairman Ben S. Bernanke and his nominated successor, Janet Yellen, have emphasized that the central bank is committed to supporting the recovery. And even after the Fed ends its bond-buying program, short-term interest rates will likely remain near zero throughout next year.
But the housing market is poised to face a new headwind: New rules slated to take effect in January could make it more difficult for potential home buyers to qualify for a loan. Lenders are expected to ensure that no more than 43 percent of borrowers’ income is being used to pay down debt, among other things.
Some economists say the housing recovery won’t be derailed by these speed bumps. A pickup in hiring, resilient consumer spending and a moderation in interest rates should keep the sector humming at least through the end of the year.
But it is no longer expected to be the driver of growth that many had predicted. Some analysts doubt those strong gains will ever materialize. Others have merely pushed their forecasts out another year.
“I still think housing is going to be a big plus for the economy,” Zandi said. “But the timing is more questionable.”