Why the U.S. Housing Market Recovery Will Falter This Year

Housing Market Recovery in JeopardyThe chart below is of the S&P Case-Shiller Home Price Index, an index that tracks home prices in the U.S. housing market. As the chart shows, from their peak in 2007 to their low in late 2011, U.S. homes prices fell by about 30%. Since then, prices in the housing market have improved, but they are still down about 20% compared to 2007. Basically, home prices have recouped only one-third of their losses from the 2007 real estate crash.

Yes, the U.S. housing market has regained some lost ground, but it’s far from being back to where it was in 2007. And I’m very worried about the pace of the housing market recovery; I feel that the recovery is in jeopardy.

HPI SP Case-Shiller Home Price Index Chart

Chart courtesy of www.StockCharts.com

Consider this: the interest rate on the 30-year fixed mortgage tracked by Freddie Mac increased to 4.43% in January of this year from 3.41% in January of 2013. (Source: Freddie Mac web site, last accessed February 26, 2014.) While there hasn’t been much mainstream media coverage on this, mortgage rates have increased by 30% in one year’s time. With the Federal Reserve cutting back on its quantitative easing program, interest rates are expected to continue their path upwards in 2014.

Higher interest rates are pushing would-be homebuyers away from the housing market. The U.S. Mortgage Bankers Association reported last week that its index, which tracks mortgage activity (of both refinanced and new home purchases), fell 8.5% in the week ended February 21. (Source: Reuters, February 26, 2014.)

And new homebuilders are seeing demand from homebuyers decline in the housing market as well. While presenting the company’s corporate earnings for the fiscal year 2014, the CEO of Toll Brothers, Inc. (NYSE/TOL) said, “As we have previously discussed, after very strong contract growth beginning in the fourth quarter of FY 2011 and running through the third quarter of FY 2013, demand has leveled more recently against some very strong prior year comparisons…” (Source: “Toll Brothers Reports FY 2014 1st Qtr Results,” Toll Brothers, Inc., February 25, 2014.)

Listen to those who know the U.S. housing market better. Robert Shiller, the co-creator of the S&P Case-Shiller Home Price Index, during an interview last week with CNBC said, “My instinct is that this momentum (in housing prices) will dissipate.” (Source: “Shiller: Signs housing is weakening,” CNBC, February 25, 2014.)

If there is one thing the housing market detests, it’s rising interest rates. Higher interest rates simply push would-be homebuyers away. And with rates expected to continue rising in 2014, I see the housing market rebound stagnating this year.