Home prices in cities across the nation are picking up steam.
Prices in the 20 metropolitan areas measured by the The S&P/Case-Shiller 20-City Composite Home Price Index rose 5% year over year in February, compared with a 4.5% gain in January. February’s increase was the largest monthly gain for the index since July 2014.
"We’ve seen a lot of people come back into the market on the buy side," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices. "Clearly, we’re still benefiting from very low mortgage rates for those people who can easily qualify for a mortgage."
The average rate for a 30-year fixed mortgage stands at 3.65%, compared to 4.33% at this time last year, Freddie Mac said last Thursday.
The broader S&P/Case Shiller Home Price Index, which covers the entire U.S., rose 4.2% year over year in February, vs. a 4.4% gain in January.
But real estate is local.
Denver and San Francisco showed the most price inflation over the past year, with gains of 10% and 9.8%, respectively.
"The West and Florida are looking very strong and these were some of the boom spots eight to 10 years back," Blitzer added.
Areas such as the Midwest aren’t showing as much momentum. Prices rose 2.3% over the past year and fell 1% during February. Home prices in Chicago rose 3.3% year over year and showed no growth in February.
Going forward, Blitzer is bullish on housing.
"Prices will be up for the full year, but I’m not convinced they’ll be up 5%," he said. "We’re talking at least 3% or 4%," he said.
And that’s as the Federal Reserve’s expected policy shift looms in the background, and as the Fed’s April policy meeting takes place. Higher interest rates translate into higher borrowing costs for potential buyers. Investors aren’t expecting a rate hike to be announced until the Fed’s September meeting, however.
But Blitzer doesn’t feel too threatened by the Fed actions.
"When the Fed does raise interest rates, it will roil markets for two or three days and spook a few home buyers," he said. "But the big question is not the first increase, but how soon the next increase is."
Blitzer says if the second increase occurs at the FOMC meeting following the first hike, it will look like the Fed is worried about inflation, increasing angst among investors. Inflation has remained weak in recent months despite low rates.
"But if the next increase doesn’t come for two, three of four meetings later, everyone will be relaxed and it won’t have much impact on the economy," Blitzer says.
This article was republished with permission from TheStreet.