Home-price growth has slowed across the board, and Capital Economics says the slowdown is on track to meet the company's forecast for inflation to slow to 4% in 2015.
“Even we were a little surprised by the consecutive month-on-month declines in house prices during April, May and June on the new monthly Case-Shiller national measure,” said Paul Diggle, property economist with Capital Economics. “Echoing that message, the Case-Shiller 20-City measure of house prices fell during the latest two months.”
Diggle said that one potential explanation for this weakness is the lingering effect of the unusually high share of distressed sales during the crash, which may have skewed the seasonal adjustment process.
He noted that applying seasonal factors from before the crisis does indeed paint a more sanguine picture of the previous few months, with the national index rising 2.7% since February rather than falling 0.4%.
However, this explanation doesn’t sit comfortably with June’s 0.1% month-over-month decline in the CoreLogic measure that excludes distressed sales.
That measure was weaker than the headline index, which was unchanged in June. “The recent month-on-month declines in the Case-Shiller measure of house prices are probably simply the consequence of the very weak sales numbers over the turn of the year,” Diggle said.
The severe weather, as well as a sharp rise in mortgage interest rates, knocked off 13% from total home sales between July 2013 and March 2014, he said.
That helped to push the months’ supply of unsold stock to a 21-month high of 5.5. The time it takes for sales to be registered, as well as the lag built into the Case-Shiller measure by virtue of the fact that it is a three-month average, mean that the drop in sales is only now showing up in house prices.
But at 6.2% year-over-year in June, house price inflation is at a 19-month low and below Capital Economics’s previous forecast of 7% year-over-year by year-end. “We’re lowering that forecast to 4% year-over-year in light of the latest slowdown, but we’re sticking with our existing forecast of 4% in subsequent years,” Diggle said.
“Admittedly, the recent data suggest that a weaker outturn is possible, but the economic fundamentals are supportive.”
He said that mortgage interest rates are low and will remain low even after they start rising early next year, there’s plenty of underlying momentum in jobs growth and real disposable incomes are rising sharply.
The resulting increase in home sales means that, even with the for-sale inventory rising, the balance between supply and demand will loosen only modestly. That’s consistent with a gentle slowdown in house price inflation.
“With housing approaching fair value, a slowdown in house price inflation more-or-less into line with income growth should be seen as a welcome development,” he said.