August US home prices as measured by the Case-Shiller 20-City index posted a better than expected 0.9%MoM gain (sa). In YoY-terms, prices rose 12.8%, up from 12.3% in July. This was another month with almost too-good-to-be-true price increases. And indeed we think this will not last. We expect price increases to decelerate in the coming months as higher mortgages rates make themselves felt. While prices are a lagging indicator, we are already seeing signs of a cooling housing market in other indicators, such as stalling homebuilder confidence and yesterday’s fallback in September pending sales. Since the September “no taper after all”-FOMC meeting, mortgage rates have come down slightly again, but 15/30-year fixed rates are still 50-70bp higher than at the start of the year. Mortgage applications for purchases have stabilised since the Summer, at about 10% below volumes seen in the first months of the year.
All of this means that demand is easing in the face of higher mortgage rates, but has not collapsed. As the housing market adapts, it shifts into a lower gear. This is not an unwelcome development. With low rates and buoyant sentiment and prices, a new housing craze seemed to be in the making this Spring. That danger is now disappearing, as the housing market moves into more gentle waters. It will be interesting to see how the Yellen Fed is going to weigh housing market developments in its tapering decision making.