Home prices levelling off?

INDICATOR: May Federal Housing Finance Agency Home Prices

KEY DATA: FHFA: +0.7%; Year-over-Year: +7.3%

IN A NUTSHELL: "Home prices continue to rise but the pace may be slowing."

WHAT IT MEANS: Home price increases have tremendous impacts on the economy as consumer feel more wealthy and households build equity that allows them to get out from under and sell their homes. Those gains are continuing. The Federal Housing Finance Agencies index rose strongly in May. However, two regions, East South Central and Mountain, were down and the West North Central area was flat. It looks like the middle part of the nation has hit a soft spot. In contrast, the East Coast, from New England to the Middle and South Atlantic states, continue show strong increases in prices. The Northeast had lagged and it appears to be finally catching up. Nationally, the gain over the year was still solid but it seems to have plateaued. The increase was the same as in April but lower than the peak rise, which was posted in March. Prices remain over 12% below the peak but they are clearly coming back and should take out the former top in about two years. Since the data have been published, starting January 1991, prices are up at a 3.2% annualized pace. That didn't make housing a particularly good investment for all those people who bought and held.

MARKETS AND FED POLICY IMPLICATIONS: I keep saying that the faster the better when it comes to housing price gains and that is still what is happening. But these data are for May before the interest rates popped. Price increases had already started to decelerate and that could continue as the higher rates get capitalized into the prices. That means the residential real estate sector and the economy will continue to growth but housing may not be able to make up for some of the negatives such as sequestration and weakening world economic activity. Investors may not even know this number exists but they should. It, along with the other housing price reports, will provide insight into home prices. If the gains slow or stall, that would not be good news for households or growth. We still have over a week before the potentially critical second quarter GDP number is released and given that earnings season is well under way, the markets' focus will be somewhere else. But second quarter profits are the past. It's the future that matters and this number is somewhat neutral about where the economy and ultimately earnings will go.