November 26, 2013 / 5:50 PM / 4 years ago

U.S. house price gains to downshift abruptly next year

WASHINGTON (Reuters) - U.S. home prices rose so quickly this year that analysts worried just a few months ago that a new property bubble was inflating. Those concerns are fading quickly.

A sharp rise in market interest rates has economists in a Reuters poll trying to figure out how much the U.S. housing market will cool next year.

Reduced economic stimulus by the Federal Reserve and more homes for sale will slice the pace of house price gains nearly in half in 2014, the survey found. Home resales are expected to hold near their current level.

This doesn’t mean a downturn is imminent. Borrowing costs are still historically low, and steady job growth is helping more people afford homes. Most economists think the nation’s housing sector will keep growing, just at a more modest pace.

“We still believe in the trajectory,” analysts at Bank of America-Merrill Lynch wrote in a research report last week. But price gains won’t pick up again “for years to come.”

The Case-Shiller 20-city index of home prices is seen rising 6.5 percent next year, down from an expected 11.4 percent rise in 2013, according to the median of forecasts from 22 economists polled by Reuters.

Both of those figures were marginally higher than in a Reuters poll in August, when most investors thought the Fed was on the verge of dialing back its bond-buying stimulus.

Data on Tuesday showed U.S. single-family home prices rose in September and posted their strongest annualized gain in 7-1/2 years. The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.7 percent in September on a non-seasonally adjusted basis, matching the Reuters forecast.

The Reuters poll was conducted before the release of Tuesday’s homes prices data.

The U.S. central bank, which has been buying $85 billion in Treasuries and mortgage-backed securities (MBS) per month, surprised Wall Street by keeping its stimulus at full throttle in September.

But all of 26 analysts polled expect the housing market recovery to continue even if the Fed reduces and eventually withdraws its purchases of Treasuries and MBS.

Analysts now expect a more modest rise in interest rates in 2014 as the Fed slowly winds down its purchases. The first reduction in its bond buying is expected in January or March.

Expectations of tighter monetary policy are already pushing rates higher.

Last week, the average rate on a 30-year fixed mortgage was about 4.5 percent - about one percentage point higher than in May, before the Fed started talking about the possibility of ratcheting back its stimulus.

Mortgage rates will likely average 4.61 percent next year, the Reuters poll found. In August, those rates were expected to average nearly 5 percent in 2014.

Costlier home loans have weighed heavily on the market since mid-year. Home resales fell in October to their lowest since June, while contracts to buy previously owned homes, an indicator of sales a month or two in the future, also sank.

Next year could bring little improvement for existing home sales. Americans will likely buy about 5.2 million previously owned homes in 2014, according to the poll, roughly the same pace as was clocked in September.

Still, builders are expected to continue breaking ground for new homes to meet rising demand as more Americans find work.

“The recovery will continue, but very slowly,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Assessments like that stand in stark contrast to the warnings made just a few months ago.

In June, the National Association of Realtors said prices were rising at an unsustainable pace, while housing economist Robert Shiller said price gains in some cities could point to a new housing bubble in those areas.

While prices could rise less quickly, the number of Americans who owe more on mortgages than their homes are worth will likely fall further, the poll found.

Joseph LaVorgna, an economist at Deutsche Bank in New York, said this would be “a powerful tail wind” for household finances.

That’s because families who aren’t under water on their mortgages might feel better spending cash on other things, so even slow gains in housing could help growth across the economy.

For other stories from the poll see

Polling by Swati Chaturvedi and Ashrith Doddi in Bangalore; Writing and additional reporting by Jason Lange in Washington; Editing by Chris Reese

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