Home Prices Fly High in the Mountains (But a Slowdown is Coming)

By Brad Hunter

Updated June 25, 2018

June 21, 2018

Home prices have risen 6.4% over the past twelve months, according to the Federal Housing Finance Agency (FHFA).  This covers the period from April 2017 to April 2018.  The rate of price increase was greatest in the Mountain Region, where prices rose 8.9%.

Although the rate of appreciation was strong over the past twelve months, the increase for the month of April was only 0.1%.  This confirms a continued slowdown in the latest monthly data.  The annual rate of increase of 6.4% is actually the lowest reading in over a year.

The slowdown was inevitable, given the way home prices had been rising faster than people’s ability to afford homes.  This has become particularly true in Denver and other markets in the Mountain Region over the past three or four years.  I expect home values to rise at a still-slower rate in the next twelve months.

Home prices are back above their bubble peaks in 59 of the nation’s 100 largest markets.  According to a new study by the Harvard Joint Center for Housing Studies, prices were furthest above peak-bubble-levels in metros that experienced only a modest downturn after the crash and then a surge in appreciation, such as: Denver (where home prices are 62 percent above the previous peak), Austin (58 percent above), Dallas (55 percent above), and Houston (44 percent above peak).

My forecast is for home prices appreciation to slow sharply in the markets that have the most severe affordability gaps, but to slow steadily in the nation as a whole as well.  I expect the rate of increase to be shaved down by a full percentage point or more next year and the year after.  In other words, instead of growth rates in the 6% range (based on these FHFA numbers), look for growth rates closer to 4.5% – 5% in the next year or two.  And bear in mind:  rising mortgage rates will add to the downward pressure on home price appreciation.

How Home Shoppers Are Responding

And, as would-be home shoppers find current home prices daunting, many are deciding not to move after all, turning to home improvements to meet their needs.  This trend is discussed in our new True Cost Report.  From our surveys, we saw that homeowners are choosing remodeling over selling and moving.  In fact, 84% of homeowners plan on staying in their current home, and half of all respondents said they are considering a remodel.  And, also from the report, two out of three homeowners said they are planning to spend the same amount or more on home improvements in the next twelve months as they did in the prior twelve.

FHFA is the agency that regulates Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks.  The FHFA House Price Index (HPI) has advantages over certain other measures of home prices (such as median sales price) because it compares the price of the same house at two points in time. It has this in common with the S&P Corelogic Case Shiller Index.  This information covers mortgages that have been purchased or securitized by Fannie Mae or Freddie Mac. 

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