Rise of Home Prices Slowing, Not Stopping

Home prices across the US have been growing rapidly for the past few months, according to Business Insider.  March this year had a staggering 10.87% increase - .65 more than expected, and the highest increase seen since April 2006.

However, home-seekers will be pleased to hear that this pace is expected to slow in the coming months.  The graph above depicts home prices across all categories for the city of Chicago over the last six months. The blue bars represent home list prices that went under contract in the corresponding week. Green bars represent the transacted (sold) price of homes that closed in the corresponding week. Note that contracted home prices have actually leveled out in the last 4 weeks, while the closed prices (reflecting contracts written 5-7 weeks prior) are still climbing.  The blue bars are indicative of what the green bars will look like 5-7 weeks out.  Chicago is seeing home price growth slow consistent with the experience of the nation as a whole.

We look to Paul Diggle of Capital Economics for his opinion as to why home price growth is slowing:

1. Price gains of these double-digit types are not sustainable.  If it continues to rise, buying rather than renting would become less preferable.  Additionally, mortgage interest rates would likely rise alongside it (as trends have indicated - another reason we encourage buyers to look sooner rather than later).  While the trends indicate increase, Diggle anticipates a slowing in the rate of increase, so the buyer-base does not wane.

2. "Bargains" are not an easy find.  Investors are interested in these bargains, and when there is scarcity, there will be a slow-up - especially when it will take time for the traditional homebuyer's base to make up for the decline in investors.

3. Inventory is thinning out.  In this case, sellers will be inclined to return to the market.

With all this being said, while price slowing can be expected, buyers should note that price decline is not.  Buyers should strongly consider looking now rather than waiting for a market improvement, because this is not anticipated.  In fact, in March, economists estimated that home prices would rise 8% overall in this coming year.  Personally, we expect these estimates to revise down again just a bit.

If you are looking for more clarity of the market here in Chicago, and/or want to get the ball rolling on your property search, give me a call or send me an e-mail.