by Jeremy Stoltz
Home Prices dropped 0.1 percent for November, but are still up significantly from a year ago, according to the Standard & Poor's Case-Shiller index. The index, based on a three-month average in 20 of the largest U.S. markets, found prices to be 13.8 percent higher from November 2012 to 2013. The usual suspects — Phoenix, Miami, Las Vegas and San Francisco — continue to top the list of markets with the most significant gains.
Mortgage rates have risen since the Federal Reserve began tapering QE3 in December, lowering demand and pushing many Americans out of the market. Some economists are warning that the housing market is already in the middle of a bubble that could burst as soon as the end of 2014.
QE3 Tapering
Dallas Federal Reserve President Richard Fisher declared in June of 2012 that the housing market had bottomed out and could only improve from there. The following month Zillow reported a 0.2 percent increase in its home value index, the first gains since 2007.It was September 2012 when the Federal Reserve commenced QE3, purchasing $85 billion per month in mortgage-backed securities and U.S. Treasurys. Home prices rose for 18 consecutive months in several markets after the asset purchase policy was put into place.
Robert Shiller, co-founder of the index bearing his name, told NBC News that the possibility of another housing bubble is real. The Federal Open Market Committee wrapped up its January meeting with the general consensus being the asset purchase program will be further reduced to $65 billion per month starting in February.
Shiller believes the tapering will push both bond yields and mortgage rates upwards, stopping all momentum the housing market has gained during the last 20 months.
New Construction Down
Home prices are not the only aspect of the market that is on the decline. New home starts dropped 9.8 percent in December, but starts for all of 2013 were still the highest since 2007, according to the U.S. Commerce Department. But this news has not dampened the outlook for new home sales by economists.Moody's Analytics, an industry leader in economic forecasting and bank stress testing, says new home sales will increase by more than 50 percent in 2014. David Crowe, chief economist for the National Association of Home Builders, believes new home sale will rise 40 percent. Economists for Wells Fargo Securities are not near as bullish, expecting only a 20 percent increase in new home sales.
Forbes noted that short supply was a primary culprit in sharp price increases during the first part of 2013. The rise in new constructions, along with rising prices, should put inventories back to regular levels.
Rates Will Continue To Rise
Zillow predicts mortgage rates will hit the 5 percent mark by the end of 2014. This, of course, is higher than recent rates, but is still historically low. The 36-year average was 9.2 percent prior to 2008, and never got below 5.8 percent.Jeremy Stoltz is an economist, chess player and hiker.