NEW YORK ( TheStreet) -- In recent months it's become clear that the housing market has turned around, with prices this spring adding to the 7.3% gains of last year. But future gains are likely to be more modest -- about 2.5% this year.
While many homeowners would prefer faster appreciation, gains of 3% to 4% are probably healthier over the long run than larger ones. Too much appreciation produces bubbles, which do terrible damage when they collapse. If home prices grow faster than incomes, fewer and fewer people can afford to buy, and prices eventually drop to reflect the lower demand that results.
Also, home price gains are not really money in homeowners' pockets, because the next home you buy is probably getting more expensive too.But why won't homes appreciate faster? After all, in most parts of the country, homes are still worth far less than they at their peak in 2006 or 2007. CoreLogic says several factors are at play. The heavy demand from investors buying foreclosed properties will diminish as rising prices and falling foreclosures reduce the number of bargains. A shortage of homes for sale will diminish as rising prices draw more sellers into the market. Price gains, for example, will reduce the number of underwater mortgages -- where the homeowner owes more than the home is worth -- making homes easier to sell. "Price appreciation will also be limited by the increase in supply as more new homes are built," CoreLogic says. All these factors will reduce appreciation to the long-term average of 3% to 4%, CoreLogic's projections suggest. Even the hottest markets of 2012 are likely to slow down. Phoenix, Ariz., one of the hardest hit by the housing collapse, enjoyed price gains of nearly 24% last year, but prices are likely to fall 1.5% this year, CoreLogic says. What are the implications for buyers and sellers? A modest pace of price gains gives prospective sellers little incentive to wait. If you want to move, go ahead -- you're not likely to get a lot more from your home in six months or a year. Prospective buyers, on the other hand, can afford to be picky. You probably won't pay much more in six or 12 months than you would today, and as time goes by there may be more homes to choose from. Buyers should also keep in mind that the lower the rate of appreciation, the longer it takes to break even on a home purchase. To sell your new home without a loss, the price must rise enough to offset costs such as transfer taxes, legal fees and the 6% real estate agent's commission. Buyers and sellers should also keep an eye on mortgage rates, which remain very low, making homes very affordable. If rates were to begin rising quickly, prospective buyers would be wise to move quickly to save money on monthly payments. Prospective sellers, too, should get off the fence if that happens, because rising borrowing costs mean buyers cannot spend as much. High mortgage rates therefore undercut home prices, causing them to fall, or to rise more slowly.