Home prices rise in May, though pace slows

NEW YORK Tue Jul 30, 2013 1:57pm EDT

A single family home is shown for sale in Encinitas, California May 22, 2013. REUTERS/Mike Blake

A single family home is shown for sale in Encinitas, California May 22, 2013.

Credit: Reuters/Mike Blake

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NEW YORK (Reuters) - U.S. home prices rose in May, suggesting the housing market recovery pushed ahead during the spring buying season, though the pace of gains slowed in what analysts said could be a sign of things to come.

Home prices gained 1 percent on a seasonally adjusted basis, according to the S&P/Case Shiller composite index of 20 metropolitan areas. That was shy of economists' forecast for a 1.5 percent increase and marked a slower pace than April's 1.7 percent rise.

The report did not alter economists' views that the housing sector's recovery is progressing, making it a bright spot for an economy that likely saw growth slow sharply in the second quarter.

However, economists did flag the potential for higher mortgage rates to dampen the speed of the rebound down the line.

"There is probably going to be a depressing effect from higher mortgage rates, but it will not be enough downward pressure to keep the housing market from expanding," said Celia Chen, senior director of housing economics at Moody's Analytics in West Chester, Pennsylvania.

Without seasonal adjustment, prices rose 2.4 percent in May and on a national average they were back at their spring 2004 levels.

Analysts said a moderation in price gains was to be expected, given the acceleration of home values. A tightening of inventory available for sale, fewer foreclosures and buying from investors have helped push prices higher over the past 1-1/2 years as the battered housing sector has gotten back on its feet.

"It's not surprising. It's been rising so quickly," said Chen.

Home prices compared to last May also fell short of expectations, though they still racked up a hefty 12.2 percent surge, the biggest annual gain since March 2006.

Borrowing costs have risen in anticipation of the Federal Reserve's plans to start winding down its economic stimulus later this year if the economy progresses as expected.

Fed officials begin a two-day policy-setting meeting on Tuesday, and investors will be watching Wednesday's statement at the meeting's conclusion for clues on when the Fed's $85 billion a month in bond purchases may start to slow.

Since early May, mortgage interest rates have climbed about one percentage point. Data on Monday suggested the increase cut into pending home sales, which dropped in June.

Still, rates remain low by historical standards and most economists do not expect the higher costs to derail the housing market. In the short-term, it could also spur potential buyers to act before rates rise further.

May's home price data likely did not capture the rise in rates as the contracts would have been signed before rates began increasing, Bank of America-Merrill Lynch wrote last week.

Market reaction to the day's data was muted, with investors focused on the Fed.

The ramifications of the housing market's far-reaching collapse after prices peaked in 2006 are still visible, as illustrated by separate data on Tuesday that showed the homeownership rate fell to a 17-1/2 year low in the second quarter.

Home prices in all 20 cities covered by the Case Shiller survey rose on a yearly basis in May, led by a 24.5 percent surge in San Francisco. Two cities - Dallas and Denver - reached record levels, surpassing their peaks reached during the housing boom. It was the first time any city has racked up an all-time high, the survey said.

The rise in mortgage rates and speculation over when the Fed will unwind its stimulus may also have weighed on consumer confidence this month, said Christopher Low, chief economist at FTN Financial in New York.

Consumer confidence waned in July as Americans took a dimmer view of the outlook for the economy and labor market, separate data on Tuesday showed. Still, their view of current conditions was more upbeat, rising to the highest level in five years.

The Conference Board said its index of consumer attitudes slipped to 80.3 in July from an upwardly revised 82.1 in June. The report was shy of economists' expectations for the index to hold steady at June's original reading of 81.4.

The expectations index dropped to 84.7 from 91.1. Still, consumers were not so gloomy about current conditions, with the present situation index rising to 73.6 from 68.7, the highest level since May 2008.

(Additional reporting by Richard Leong in New York and Lucia Mutikani in Washington; Editing by Kenneth Barry)

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