Home prices accelerate nationwide, fueling affordability concerns

Home prices posted a 4.5 percent year-over-year increase in December, according to the monthly S&P/Case Shiller index of property values. Housing market affordability has proven a concern for Federal Reserve Chair Janet Yellen, who began a two-day series of testimonies before Congress Tuesday. 

Home sales are dwindling and construction has stalled, but increased demand for homes in the face of a limited supply of those available for purchase is pushing prices skyward.

House prices in 20 cities edged up a non-seasonally adjusted 0.6 percent in December, according the S&P/Case-Shiller monthly index of property values. The increase followed three straight months of slight declines. Prices rose 4.5 percent over December 2013, slightly slower than the 4.3 percent analysts were expecting. 

All 20 cities on the index saw prices rise in December, with the fastest pace of increase reported in Denver and the slowest in Las Vegas. All cities also saw prices accelerate year-over-year, led by a 9.3 percent price jump in San Francisco and an 8.4 percent increase in Miami.

Generally, moderate price gains like these are good for the housing market: for homeowners, they improve finances and convince those who have been sitting on their homes through the crash to finally put their homes on the market, increasing the available supply. But in this recovery, home price acceleration has largely outpaced wage growth and consumer price inflation, keeping a high share of potential first-time homebuyers on the sidelines.

This can be especially problematic in areas that weren’t particularly affected by the housing crash in the first place. “In cities like San Francisco or Boston, strong price growth may be doing more harm than good,” IHS Global Insight economists Stephanie Karol and Patrick Newport write in an e-mailed report. “When a city’s housing supply is relatively elastic, it can respond to rising prices through an increase in construction. However, when a city’s construction options are constrained by geography or city ordinances, home values can rise much faster than the median income and hamper affordability.”

Such cities also have a relatively low number of homeowners with underwater mortgages, so “the incentive to list one’s home is not particularly strengthened as these assets appreciate,” they write. “Since the price growth neither encourages new-home construction nor existing-home listing, it rather impedes circulation in the local housing market.”

Affordability has proven a concern for Federal Reserve Chair Janet Yellen, who began a two-day series of testimonies before Congress this morning. In recent weeks, the Fed has seemed to take a more dovish tone on the question of when it will raise interest rates, a softening that continued in Ms. Yellen’s first round of remarks. She said Tuesday that the Fed would consider raising rates “on a meeting by meeting basis,” meaning there would be no guarantee that rates would rise at any given point.

"If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis," Yellen told the Senate Banking Committee. "Before then, the committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings."

The Fed has applauded progress like the strong job market and expanding economy, but wage stagnation and bumps in the consumer economy have prevented the central bank from outright confirming a rate hike for the summer.