Home prices still growing but mortgage rates slow the pace

Red home for sale sign with arrow

Home prices are up dramatically across the country, but the rebound seems to be losing some steam.

June home prices in the 20 largest cities posted an average annual increase of 12.1%, according to the S&P/Case-Shiller Index, one of the best measures of how your property values are doing.

Although that's a nice gain, it's slightly less than the 12.2% gain we saw in May.

And while all 20 cities posted gains on both a monthly and annual basis, only six cities saw prices rise faster than they did the previous month.

Las Vegas enjoyed the fastest-growing property values over the past year, with an annual increase of 24.9%.

San Francisco property values have seen the biggest overall rebound, jumping 47% since their March 2009 low.

Even though New York is lagging well behind other cities, it still managed an annual gain of 3.3%.

Check out this chart of the monthly and year-over-year changes of all 20 cities and both composites.

Case-Shiller Comparison

Metropolitan Area June/May Change (%) 1-Year Change (%)
Atlanta 3.4% -19%
Boston 1.7% 6.7%%
Charlotte 1.3% 7.8%
Chicago 3.3% -7.3%
Cleveland 1.9% 3.5%
Dallas 1.7% 8%
Denver 1.7% 9.4%
Detroit 1.7% 16.4%
Las Vegas 2.8% -24.9%
Los Angeles 2.3% 19.9%
Miami 2.1% 14.8%
Minneapolis 2.3% 11.5%
New York 2.1% -3.3%
Phoenix 1.8% 19.8%
Portland 1.9% 11.8%
San Diego 2.8% 19.3%
San Francisco 2.7% 24.5%
Seattle 1.8% 11.8%
Tampa 2.1% 11.1%
Washington 1% 5.7%
Composite 10-city 2.2% 11.9%
Composite 20-city 2.2% 12.1%

Since this data is from the heart of the spring buying season, we would expect to see strong, month-to-month increases from May to June.

But we didn't, and there's no doubt in anyone's mind that rapidly rising mortgage rates are the culprit here.

During that time, the average cost of 30-year fixed-rate home loan rose by a percentage point to its most expensive point in two years.

Since last September, the Federal Reserve bank has been buying about $85 billion in long-term debt a month — $45 billion in Treasury bonds and notes and $40 billion worth of mortgages.

When the Fed buys bonds backed by thousands of home loans, it essentially floods the market with money, pushing down the cost of financing a home.

That's why mortgage rates plunged to new record lows much of the past year.

But the Fed has now purchased more than $3 trillion worth of government and government-backed mortgage debt since the financial crisis hit in 2008 — and that's a lot, even in the mega-banking world it inhabits.

Early this year, the Fed's rate-setting committee began debating when to end those purchases, with some members pushing to cut back this summer, while others urged the Fed to stay the course at least until fall.

Katie Johnson success story

Secrets to paying off a mortgage in 10 years. Katie and John Johnson were newlyweds in August 2003 when they borrowed $205,000 for their Salem, Oregon, home with a 30-year, fixed-rate mortgage and 15-year balloon loan. Now, after a decade of attacking that debt in an organized and determined fashioned, the Johnsons are counting down to their final mortgage payment. Here’s how they did it — and you can do it, too.

Bernanke then shook the financial industry in late May when he told a congressional committee that, "We could in the next few meetings take a step down in our pace of purchases."

That was a clear enough signal to send the stock markets tumbling and trigger a late-spring spike in long-term interest rates.

Then Bernanke stepped before the microphones again after the Open Markets Committee meeting on June 19 and elaborated on that plan.

The powerful banker said the Fed will begin to scale back purchases of Treasury and mortgage-backed bonds later this year — perhaps as soon as the committee's next anxiously awaited meeting on Sept. 18 — and end them altogether when the unemployment rate hits 7%.

Bernanke expects to reach that milestone by the middle of next year, which certainly seems attainable after July's jobless rate fell to 7.4%.

Those announcements prompted nervous banks, credit unions and mortgage companies to charge more for home loans now in anticipation of that change in policy.

The run of record-low rates we enjoyed last fall and winter is almost certainly over, and borrowers must now ask themselves how far and how fast will rates rise during the next few months.

That will go a long way toward determining how fast home prices will grow.

Mitch Strohm on Google Plus.
Join all of the savvy readers following Interest.com on Twitter and Facebook.