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Housing Prices: Prepare for a Moderation

NEW YORK ( TheStreet) -- The recent heat up in the housing market could soon experience a decline in mortgage applications and a moderation of prices.

New-home sales rose 2.1% in May to a seasonally adjusted annual rate of 476,000, according to the Census Bureau, while the S&P/Case-Shiller 20-city home price index in April gained 12.1% year over year.

"Mainly I think what we would expect to see is mortgage applications fall a little bit and price gains moderate," said Brad Sorensen, market and sector research director at Charles Schwab. "Prices would still go up, but not at the same rapid rate, and that's what you would expect to see during a recovery anyway."

The environment has shifted rapidly to a seller's market as inventories remain low.

Housing prices slowly have been recovering from their post-recession lows, and this is now being coupled by rising sentiment that the Federal Reserve may start to raise interest rates sometime in the near future. That discussion is somewhat muddied as Fed Chairman Ben Bernanke said last week that the central bank wouldn't begin to raise the federal funds rate very soon, while the benchmark 10-year Treasury note has risen substantially since early May.

Rising prices and the possibility of rising rates has triggered more participants into the market.

"I think a lot of people have caught on to the fact that all of this wasn't going to last forever," said Diane Saatchi, an associate broker at Saunders & Associates in the Hamptons of Long Island, N.Y. "There are some sellers looking a little bit worried because they kind of see that if interest rates start rising, maybe the economy's not as good as they thought it was."

-- Written by Joe Deaux in New York.

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