The housing market is starting to cool down

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  • The rise in house prices in May was slightly slower than in April.
  • Prices could continue to rise during the summer due to weak supply and strong demand.
  • Home prices could fall in 2021 as foreclosures increase.

The US real estate market showed signs of slowing down in May. While home prices continued to rise, they did so at a slower pace than in April. This is likely due to the brief but sharp slowdown in home sales caused by the pandemic.

Home prices rose at a slower pace in May

The S&P CoreLogic Case-Shiller US National Home Price NSA Index reported an annual gain of 4.5% in May, up from 4.6% in April. Home prices in the 10-city composite rose 3.1% per year, down from 3.3% the month before. The 20-city composite index posted a 3.7% year-over-year gain, up from 3.9% in April.

Phoenix, Seattle and Tampa recorded the highest annual gains among the 19 cities (excluding Detroit) in May.

Craig J. Lazzara, executive at S&P Dow Jones Indices, said:

More data will obviously be needed on whether May’s report represents a reversal of the previous trajectory of price acceleration or just a slight deviation from an otherwise intact trend. Even if prices continue to decelerate, it is quite different from an environment in which prices are actually falling.

The National Association of Realtors (NAR) reported last week that the median price of existing homes was $ 295,300 in June, up 3.5% per year, with prices rising in every region. Home inventories totaled 1.57 million units in June, up 1.3% from May, but still down 18.2% from a year ago.

So far, house prices have mostly remained insulated from the pressures of the pandemic.

Falling mortgage rates boosted home buyer demand. At the same time, the supply of homes for sale across the country remains very limited.

The gap between the demand for housing and the country’s inventory has pushed up prices. Many potential sellers have postponed listing their homes due to concerns about the state of the economy, compounding the shortage.

Home prices may continue to rise in the short term

The gap between supply and demand is why many economists say house prices will continue to rise even if the labor market is hit again by the pandemic.

Mark Fleming, chief economist for title insurer First American, wrote in a report on Monday:

Even under a pessimistic outlook for the labor market, the housing market would benefit from an increase in the purchasing power of housing, as mortgage rates are likely to come under downward pressure. In this case, the appreciation of house prices remains strong, but does not accelerate. The supply-demand imbalance that existed at the start of the pandemic has persisted and even worsened, meaning house price growth will likely remain strong this summer.

Housing market could take a hit in 2021

Home prices may continue to rise through the summer and the rest of 2020. They likely won’t continue to rise forever.

There are signs that house prices could eventually drop. According to the Federal Housing Finance Agency’s (FHFA) house price index, US house prices fell 0.3% in May.

Prolonged economic damage from the pandemic could cause housing prices to drop in 2021. Federal regulators have offered a forbearance option to anyone with a mortgage backed by Freddie Mac, Fannie Mae or Ginny Mae, preventing homeowners without employment to be subject to seizure. Forecasters expect home prices to start falling next summer when the forbearance year is about to expire.

Frank Nothaft, economist at CoreLogic, says:

There is a lot of uncertainty there. When we look at the mortgage market in particular, we are very concerned that we will see a surge in default rates and foreclosure rates as we approach 2021.

CoreLogic expects nationwide home prices to decline 6.6% year-over-year by May 2021.

Home prices are likely to come down first in major cities as Americans flee to the suburbs.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

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