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Case-Shiller: Rising mortgage rates, home prices pull on affordability

Current pace may not be sustainable

Homebuyers are going to continue to need larger loans as home prices increase, according to the latest report released by S&P Dow Jones Indices and CoreLogic.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. Census divisions, shows home prices increased in March by 6.5% annually, the same gain as the previous month.

One expert explained that while current demand for mortgages remains high, rising mortgage rates could soon begin to change that.

“A generally strong economy and favorable demographic tailwinds driven by the huge Millennial generation aging into their home buying prime will help ensure that demand stays high, even as prices rise,” Zillow Senior Economist Aaron Terrazas said.

“Getting a mortgage remains incredibly affordable compared to paying rent each month, but that advantage is starting to erode as mortgage interest rates rise alongside prices and income growth lags behind,” Terrazas said. “This deteriorating affordability could begin to give some buyers pause and keep them renting longer, re-igniting an upward push in rents as the glut of new supply that came on line over the past few years leases up.”

The 10-City Composite saw an annual increase of 6.5%, up slightly from its increase of 6.4% the previous month, while the 20-City Composite increased a full 6.8% year-over-year, unchanged from the month before.

“The solid gain home prices of 6.5% in March added roughly $150 billion to housing wealth during the month,” said Lawrence Yun, National Association of Realtors chief economist. “But the continuing run-up in home prices above the pace of income growth is simply not sustainable.”

“From the cyclical low point in home prices six years ago, a typical home price has increased by 48% while the average wage rate has grown by only 14%,” Yun said. “Rising interest rates also do not help with affordability.”

Unsurprisingly, Seattle, Las Vegas and San Francisco continued to report the highest annual home prices gains among the nation’s top 20 cities with increases of 13%, 12.4% and 11.3% respectively.

“Seattle continues to report the fastest rising prices at 13% per year, double the National Index pace,” said David Blitzer, S&P Dow Jones Indices managing director and chairman of the Index Committee. “While Seattle has been the city with the largest gains for 19 months, the ranking among other cities varies. Las Vegas and San Francisco saw the second and third largest annual gains of 12.4% and 11.3%.”

“A year ago, they ranked 10th and 16th,” Blitzer said. “Any doubts that real, or inflation-adjusted, home prices are climbing rapidly are eliminated by considering Chicago; the city reported the lowest 12-month gain among all cities in the index of 2.8%, almost a percentage point ahead of the inflation rate.”

Overall, twelve of the top 20 cities reported greater home price increases for the year ending in March than the year ending in February.

Monthly, the National Index increased 0.8% in March, double the monthly increase of 0.4% in February. The 10-City and 20-City Composites also picked up the pace with increases of 0.9% and 1% respectively.

However, after seasonal adjustment, the National Index increased just 0.4% while the 10- and 20-City Composites increased 0.4% and 0.5% respectively. All top 20 cities reported increases in March before seasonal adjustment, and 19 of 20 cities reported increases after seasonal adjustment.

“Looking across various national statistics on sales of new or existing homes, permits for new construction, and financing terms, two figures that stand out are rapidly rising home prices and low inventories of existing homes for sale,” Blitzer said. “Months-supply, which combines inventory levels and sales, is currently at 3.8 months, lower than the levels of the 1990s, before the housing boom and bust.”

“Until inventories increase faster than sales, or the economy slows significantly, home prices are likely to continue rising,” he said. “Compared to the price gains of the last boom in the early 2000s, things are calmer today. Gains in the National Index peaked at 14.5% in September 2005, more quickly than Seattle is rising now.”

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