Appreciation Slows Amid Worsening Affordability

September 25, 2018

More Homeowners Will Stay Put

New data from the S&P CoreLogic Case-Shiller Index of home prices shows that the pace of home price increase is still elevated, but is finally starting to slow, as we had been anticipating. The 20-City Composite posted a 5.9% year-over-year gain in July, down from 6.4% in the previous month.

Las Vegas, Seattle and San Francisco continue to lead the pack, all with double-digit rates of home appreciation. These cities saw the following year-to-year increases.

• Las Vegas – 13.7%
• Seattle – 12.1%
• San Francisco – 10.8%

I continue to believe that we are seeing the beginning of a larger slowdown in appreciation. Home prices and monthly payments cannot continue to outrun buyers’ incomes for much longer. Just in the past three years, the affordability index has fallen from 166 to 140.

The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.

How Will Homeowners Respond to Diminished Affordability?

HomeAdvisor’s 2018 True Cost Report suggests that many homeowners are opting to stay where they are and improving their home rather than moving. Two out of three homeowners surveyed 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, partly reflecting this shift in attitudes about moving.

Home Price Escalations to Slow Further

I hasten to clarify that what we see coming is a slower rate of increase; not a nationwide decline in home prices. While a few markets may see some price fluctuations in the months ahead, the overwhelming majority will continue to appreciate, just at a much slower pace.

My prediction going forward is that income ratios and rising interest rates will drive a leveling off of home prices, particularly in the most expensive markets in the country. My forecast is for home price appreciation to slow to 4% in 2019, and I said it could fall to the 2% range shortly after.

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