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By Jason Stipp and Robert Johnson, CFA | 09-25-2013 11:30 AM

Housing Plateau: Bad Omen or Just a Pause?

After weathering higher interest rates and supply bottlenecks, we should see continued improvement in the housing market, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. Housing has been a bright spot for the U.S. economy, but the data recently showed signs of plateauing. Is this just a pause or a bad omen? Here to offer his insights is Morningstar's director of economic analysis, Bob Johnson.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Stipp: Let's talk about the data first. What has the data been showing us? What are the recent trends?

Johnson: Certainly, pricing has been one of the pieces of data that's been plateauing, albeit at a good number, and I think we're probably in a little bit of a goldilocks situation there. This week we got the Case-Shiller data for the 20 cities, and their data showed that home prices were again up about 12% year over year, which is really a good number to see. Even the more conservative FHFA data on a year-over-year basis, which always lags far behind, was showing year-over-year growth of 8% which is actually is a little bit of an acceleration for that index.

In terms of pricing, it's very interesting. A lot of the improvement is concentrated on the West Coast. Both the Pacific region, which includes everything that touches the Pacific Ocean, and the next region over, which includes Nevada and Arizona, the mountain area, so to speak, were both up in double digits; the Pacific up 21%. But the other seven regions of the country were all in single digits. It is kind of a little bit of a biased number in some of the pricing data that more of its happening along the West Coast than anywhere else.

We've also had data this week on new-home sales, which were a little bit better than the previous month, but still below their high of last April, so we're still kind of doing OK, but not accelerating there.

Then finally, we got existing-home sales which did wonderfully. We set a new recovery high; 5.48 million existing homes sold. It's the best number since 2007, kind of a broad-based improvement.

Stipp: Let's talk about some of the short-term drivers that might be affecting these numbers and also some of the short-term factors that are out there that could affect us in the next few months to come. The first one is interest rate. When the Fed first started talking about tapering in May, we did see interest rates go up pretty dramatically and pretty quickly.

Then recently the Fed has said they're not going to do it quite yet. How has this rippled through to the housing market?

Johnson: It went through and boosted the 10-year bond, and mortgages are priced off of the 10-year U.S.-government bond. The rates are very tightly intertwined, and mortgage rates are now in the kind of the 4.5% to 5.0% range after being in the 3.5% range or so. So they went up a lot. But to put that in perspective, in 1981 when I graduated from school, rates were 15% or 16%. When the major housing boom was going on in 2004, 2007, interest rates were in the 6% to 8% range. Clearly, we've moved higher in terms of mortgage rates. It dislocated a few people looking [to finance a home] right now that had very tight budgets. On the other hand, as my associate Dave Sekera points out, this is barely a blip on the radar screen--the amount that interest rates have gone up. People will adjust and, I think, come back, and that's why homebuilders remain so optimistic.

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