Moderate Home Prices Signal Risk for Market Decline

September home price data marks the 11th straight month of moderating gains, according to the October 2014 Market Report by Clear Capital. And consumer confidence remains a hardship on stabilizing the market. 

Nationally, yearly gains decreased from a high of 11.7% in October 2013 to just 7.8% through September 2014. This trend is amplified in the West, where annual gains are cut nearly in half, from highs of 19.5% in October 2013 to 10.9% in September 2014.

If the ongoing moderation in the West, still the recovery leader, continues at its current pace it will be a foreboding sign of future declines, Clear Capital says, noting that the “Western region could be the canary in the coal mine.”

While consumer sentiment levels reached a 14-month high in September, according to the University of Michigan’s Consumer Sentiment index, momentum has tempered — like home prices.

Consumer sentiment yearly growth rates have softened seven percentage points over the last seven months, data show. 

As housing seeks stability, moderating rates of consumer confidence and price gains foreshadow a third potential dip.

“With less fuel stoking investors’ fire and the consumer yet to feel confident in the market, we expect at best either a return to pre-bubble norms or a departure into negative territory,”  says Dr. Alex Villacorta, vice president of research and analytics at Clear Capital, in a written statement.  “If improvements in the job market continue to support a rise in consumer confidence, it’s likely that owner occupied buyers will be encouraged to pick up the slack in housing demand, once held steady by investors. While sentiment data is improving as of late, we’ve yet to see sentiment reach pre-recession levels.”

Even less encouraging, Villacorta says, is that the index’s rate of improvement is softening, alongside home price growth.

“Without stronger rates of growth in consumer confidence, price gains could easily fall past the normalized annual rates of growth between 3%-5% and back into negative territory,” he says. “This has the risk of invoking a negative feedback loop between falling prices and reduced confidence from potential homebuyers.”

In addition, distressed inventory is no longer reinforcing a strong housing market recovery.

“Discounted distressed deals continue to dry up, down from a national high of 38.4% in 2011 to just 16.5% in September 2014.,” Clear Capital says. “While reduction of distressed saturation is a healthy move for markets long term, over the short term it removes a key demand segment at a time when full buyer momentum has yet to be established.”

Access the latest Clear Capital report here.

Written by Cassandra Dowell

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