‘Tis a good time to buy

Stew Larsen
Posted by Stew Larsen
Mortgage Banking

During holidays, I can’t help but think of food metaphors for the housing market. What I see today is that we have this wonderful meal served, but nobody thinks they are hungry. In many markets, I see a rare combination today of two favorable dishes: stable home prices and low interest rates.

Closeup on part of a holiday wreath on a white door.Home appreciation slows

Until a few months ago, it seemed like astronomical home price appreciation was unstoppable. It’s hard to get hungry for house hunting amid bidding wars that may be driving home prices up 20% or more from the prior year. But in recent months many markets have cooled.

While home values are generally still climbing, U.S. home price increases actually continued to slow in September, according to the latest S&P/Case-Shiller Home Price Indices released Nov. 25. Home prices are still rising, just at a slower pace than in 2013 and early this year. Case-Shiller’s 10-city composite climbed 4.8% year-over-year in September, down from 5.5% in August, and the 20-city composite increased 4.9% year-over-year versus 5.6% in August.

Even in some of the nation’s priciest markets, such as the San Francisco Bay Area, year-over-year price increases have slowed, as San Francisco Chronicle’s Kathleen Pender pointed out recently.

This slower appreciation across many markets may be welcome news for buyers for several reasons. First, we may see more inventory. Homeowners who may have been holding off selling to take advantage of the rapid appreciation may feel inclined to put their homes on the market now that the strongest appreciation appears to be behind us.

Second, slower appreciation can make housing less attractive to investors and speculators. Real estate is far more appealing to investors if the outlook is for double-digit appreciation, than when, for example, Freddie Mac’s forecast for housing is for low single-digit price increases. With fewer investors in the market, families and individuals — including first-time buyers — face less competition and potentially less pressure to inflate their offers.

Mortgage rates stay low

The added good news for potential buyers is interest rates have remained unusually low for an unusually long time. As the LA Times’ Scott Reckard points out, average 30-year-fixed mortgage rates edged below 4% this month, having started the year at 4.5%.

We are in a new period during which home prices have cooled, and rates have remained relatively low. Lower rates translate to lower monthly payments, which can help borrowers more readily qualify for a mortgage on their selected home.

The meal of low rates and gradual home price appreciation is right in front of us for many to take advantage. But like all good meals, it can’t sit there on the table forever. With the economy strengthening, the outlook is for interest rates to rise gradually in 2015, according to many economists, including our own Scott Anderson. A stronger economy may push home prices higher as well.

This meal may not be available for long. If you think you might be hungry, best to eat while the food is still warm.

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