With strong price gains continuing to make headlines, industry analysts are quick to assure us we are not in the midst of another bubble. The current pace of price appreciation will not endure much longer, they say. However, Capital Economics also assures us a deceleration in price gains does not mean an end to the housing recovery.
CoreLogic, Zillow, and other industry observers concur prices appreciation is set to slow, and Monday's _US Housing Market Update_ from Capital Economics reinforces this prediction. Furthermore, it is not the first time Capital Economics has expressed this view.
What is unique about Capital Economics' viewpoint is the firm anticipates ""a more marked slowdown in the pace of house price gains over the next year than other commentators.""
Capital Economics backs up its forecast with three indicators: the unsustainability of double-digit price gains, the impact rising prices have on investors, and the recent and impending increase in inventory.
The double-digit price gains ""never looked sustainable,"" according to Capital Economics. Homes are still undervalued, but if the current 12.1 percent annual price gain reported by CoreLogic continues, homes will soon be overvalued, the firm states.
Compared to rents, home prices would be overvalued in the next few months, and compared to incomes, homes would be overvalued by early 2015, according to Capital Economics.
The second factor that will lead to slower price gains--investor activity--is relatively intuitive. As investors flooded the market to take advantage of bargain prices, the spike in activity pushed prices up. However, as prices increase, investors find fewer compelling deals and begin to hold back.
""Demand from traditional owner-occupiers will need some time to take the place fully of investment buyers,"" Capital Economics explains.
The third cause of the impending change in price appreciation, according to Capital Economics, is that ""sellers are starting to return in greater force.""
After bottoming out in January, inventory has risen 6.1 percent. At the same time, the percentage of consumers who believes now is a good time to sell a home has reached a record high of 40 percent, according to a recent survey from Fannie Mae.
As confident homeowners begin to list their homes for sale, the tight supply, which has been ""a key driver of price increases,"" will relax, and the effect will be slower price gains.
Capital Economics contends these changes in the market ""will not signal the end of the US housing recovery, but a new phase in which house price growth is more closely aligned to earnings.""
The firm expects a 4 percent price gain in 2014.