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Home Prices Soften, But That's Not Enough To Boost Housing Market

NEW YORK (MainStreet) New housing data shows the sharp rise in home prices may be starting to slow down.

The S&P/Case-Shiller Home Price Index, which measures home prices of 20 metropolitan cities, rose 1.15% in April, but is up 10.8% year-over-year. In March, the index was up 12.4% year-over-year. The index is about 19% below its summer 2006 peak, indicating just how inflated prices were pre-crisis.

The slowdown in the rise in home prices could be a boon to potential buyers, who have been sitting on the sidelines, discouraged by prices outside of their budgets. This, along with falling mortgage rates, may also bring more buyers to the current seller's market.

Mortgage rates have been on the decline, despite the Federal Reserve's continued scale back of its bond stimulus, which has kept interest rates low for years. Freddie Mac says the average rate on a 30-year fixed mortgage stand at 4.17%, compared to 4.20% from the week earlier and 3.93% from the same time last year. A year ago at this time was when the Fed hinted at tapering its stimulus, which pushed interest rates up. The tapering began in 2014 with a $10 billion monthly reduction in asset purchases.

But analysts don't think that's enough to boost the housing market.

"The biggest barrier for people buying homes is qualifying for a mortgage and the lack of supply of existing and new homes," says David Blitzer, chairman of the index committee at S&P Dow Jones Indices.

The National Association of Realtors said total housing supply stands at 2.28 million existing homes for sale, equating to a 5.6 month supply. "That's a low number," Blitzer says. "People are having trouble finding homes they want to buy."

ITG chief economist Steve Blitz says home prices and interest rates aren't powerful enough forces to cause growth in the housing market to lift the overall economy. "Demand will be impacted by these factors, but lifting the trend line higher will take improvement in income and employment," Blitz says.

Blitz points to the importance of wage growth for those ages 25 to 34. "Until we do, we'll be traveling along a lower trend line where movements along that line are determined by price and interest rates," he said.

Investors were reminded to not take economic growth for granted, as a disappointing report on Wednesday from the Commerce Department's Bureau of Economic Analysis revised the first quarter GDP contraction of 2014 to 2.9%, compared to the previously reported 1%. The harsh winter was the root of the contraction, which stifled economic growth more than analysts expected.

- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.

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