Home Prices Still Adjusting to Find New Normal

The July 2013 Clear Capital Home Data Index Market Report indicates the current 9.3% in annual gains remain below peak values that continue to adjust until they reach the new normal in home prices.

Compared to the first quarter, home prices increased 1.6%, but according to vice president of research and analytics at Clear Capital, Alex Villacorta, only moderate house price increases, when compared to peak values, would represent a healthy recovery, which is why he expects sharp upward corrections in the short term, “followed by moderating gains as markets fall back in line with their long run levels.”

Changes differ by region and market by market. The West led regional yearly gains by 17.8%, while the Northeast prices increased only by 4.8% and the Midwest and the South reporting yearly gains of 7.5% and 7.6%, respectively.

The average growth among the top 15 performing metro markets was more than 20%—led by dramatic price increases of 31.2% in Las Vegas, which is the first metro to surpass 30% since the start of the recovery.

“What holds true for Las Vegas doesn’t hold true for Detroit, let alone San Jose,” he said. Las Vegas reported the strongest quarterly gains of 4.3%, indicating “this metro could retain its No. 1 spot over the near term,” analysts said. These drastic corrections have resulted from relatively lower property prices.

Gains are relative in Las Vegas where the median home prices rank 35 below the top 50 markets.

The median price in Las Vegas is $145,000. Comparatively, in San Jose, prices increased 26% this year even though the high median price in the area was $710,000, once again showing “demand is fueled by a strong local economy,” and as such, it will likely vary in both these markets moving forward.

As expected, Detroit remains on the lowest performing list. Nonetheless home prices increased 9.6% over the last year and its quarterly gains of 1% are the highest among the nation’s 15 worst performing markets. “These gains are particularly impressive” given the metro’s 42% REO saturation rate that is more than 27 percentage points higher than the national average.

Phoenix is another example where quarterly growth supports a yearly growth rate more in line with 10%, “as opposed to the current yearly gains of 23.3%,” he said, so the exact timing of this moderation will continue to vary market by market.

Over the last half of 2013, “a rising price floor will dampen some potential homebuyers’ appetites, particularly as recent gains bring many markets back into pre-bubble equilibrium,” he said, meaning as homebuyers adjust to the new normal, “steep discounts from the peak are not as attractive as they once were,” while inventory growth will “alleviate some of the recent pressure on prices,” he added.

The recovery will continue at a healthier and more sustainable pace “after these shifting fundamental drivers shake out.”