Home prices rose 4.7 percent in December, according to CoreLogic. That is the smallest annual gain since August 2012.
Prices are still rising because of the shortage of homes for sale, especially on the lower end of the market. But rising mortgage rates took their toll on affordability last year, causing sales to slow. Prices usually lag sales by several months.
"Higher mortgage rates slowed home sales and price growth during the second half of 2018," said Frank Nothaft, chief economist for CoreLogic. "Annual price growth peaked in March and averaged 6.4 percent during the first six months of the year. In the second half of 2018, growth moderated to 5.2 percent. For 2019, we are forecasting an average annual price growth of 3.4 percent."
The pullback now means that fewer markets are considered overvalued. Of the nation's top 50 markets based on housing stock, 40 percent were overvalued, 18 percent were undervalued and 42 percent were at value. A year ago, more than half of the nation's largest markets were overvalued. A market is considered overvalued when home prices are at least 10 percent above the long-term, sustainable level.
Price gains are shrinking in most markets, but prices are on the verge of falling in some of the formerly hottest markets, such as California.
The median price paid for all Southern California homes sold in December was $515,000, up just 1.1 percent year over year.
"The roughly 1 percent annual increase in Southern California's median sale price last month marked the lowest such gain in the uninterrupted string of year-over-year increases each month that began in April 2012," said Andrew LePage, a CoreLogic analyst. "The median's annual increases have declined over the past year as home sales slowed and inventory rose. The median's tiny annual gain last month also reflects a shift in market mix, where higher-end sales represented a slightly lower share of all activity compared with December 2017."
The pullback in home prices certainly helps the tough affordability that has plagued the housing market for the past few years, but it also has some buyers holding off as they wait for prices to fall further.
There continues to be a mismatch between the strong demand for entry-level homes and the short supply available for sale.