Home Prices Rising Beyond the Means of Many Buyers in 2015

If you’ve been reading the real estate headlines over the last year or so, you probably already know that home prices are rising in most U.S. cities. In some parts of the country, house values are rising so fast that they’re outpacing personal income and wages. This is putting homeownership out of reach for a lot of would-be buyers. It’s a trend that could continue for the f0reseeable future.

Are Home Prices Rising Too Fast in 2015?

The latest edition of the S&P/Case-Shiller Home Price Index was released yesterday. The long-running report is published on the last Tuesday of every month. It was created by economists Karl Case and Robert Shiller, the latter of whom won a Nobel Memorial Prize in Economic Sciences for analyzing trends leading up to the housing crisis.

According to the report, home prices in the U.S. rose by around 5% from March 2014 to March 2015 (the most recent data available). House values rose by double digits in some metro-area housing markets, including Denver and San Francisco.

It’s normal for home prices to rise during times of economic growth and stability. But when they begin rising faster than incomes, we start to see affordability problems. That’s what is happening right now in many U.S. cities. And the trend could continue for the foreseeable future.

According to the latest Case-Shiller analysis:

“Home prices are currently rising more quickly than either per capita personal income (3.1%) or wages (2.2%), narrowing the pool of future home-buyers. All of this suggests that some future moderation in prices gains is likely.”

By “future moderation,” they’re referring to a slowdown in home-price appreciation.

‘Future Moderation’ in House Values

We are seeing some degree of moderation already, in the fastest-rising real estate markets. Consider the following three examples:

  • Home prices in Denver rose by nearly 15% over the last year or so, according to Zillow. In contrast, the company’s economists expect Denver house values to rise by a more modest 6% over the next 12 months.
  • Home prices in Atlanta climbed by nearly 12% over the last year, with a one-year forecast of 5.5%.
  • House values in San Francisco also rose by nearly 12% in the last 12 months. Zillow expects them to climb another 5.5% over the next year or so.

Granted, these are merely predictions. But they do reflect a broader trend occurring across the country. Property values are still climbing in most U.S. cities, but at a slower pace than last year.

Low Mortgage Rates Keep Housing Affordable

On the heels of the Case-Shiller report, we have a news release from Freddie Mac that says housing is still affordable in many parts of the country. The economists at Freddie Mac agree that home prices have risen considerably over the last couple of years. But they feel that this is being offset by low mortgage rates.

According to a Freddie Mac news release published today: “Despite strong house price appreciation, low mortgage rates are keeping payment-to-incomes affordable for the typical family in most markets.”

The average rate for a 30-year mortgage loan was 3.84% at the time of publication. It has been hovering below 4% since the start of this year.

Bottom line: House values are still rising in many local housing markets across the U.S. In some cities, home prices are rising too fast in relation to income growth. In such markets, rapid appreciation will eventually lead to a reduction in buyer demand, which in turn could bring some much-needed cooling.