Home Price Gains May Slow in 2013

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Home prices are now rising at their fastest pace since 2005. Housing bulls are running again, pointing to rising construction starts, rising home sales and falling mortgage delinquencies. Fears over the so-called "fiscal cliff" put a damper on some of that optimism briefly, but that quickly dissipated after the deal was finally struck. So why be cautious now?

"Low prevailing mortgage rates, the limited supply of existing homes for sale (either due to the few foreclosure completions or the number of underwater borrowers who cannot sell), and the anemic levels of new home construction are facilitating affordability and feeding demand," noted analysts at Fitch Ratings. "These factors are offsetting weak fundamentals that would otherwise hinder home price growth, such as high structural unemployment and lackluster wage growth."

(Read More: Why 'Fiscal Cliff' Deal Will Help the Housing Recovery .)

Fitch contends that home prices remain overvalued and that price growth is not being driven by fundamentals but by technical factors that could easily change. As more homes move more quickly to final foreclosure, especially in states that require a judge in the process and have seen huge delays over the past few years, supply will expand, possibly dramatically in some regions.

Mortgage rates may also be headed higher. Several members of the Federal Reserve Open Market Committee (FOMC) thought it would "probably be appropriate to slow or to stop purchases [of assets including mortgage-backed securities] well before the end of 2013," according to minutes of the committee's latest meeting. Doing so would push mortgage rates higher. (Read More: Mortgage Recovery Still Rocky .)

Fitch analysts admit price recovery will vary widely depending on the local market conditions, but their case seems more bearish than most. Or is it?

"I personally think that a lot of the price appreciation we're seeing in many markets right now is because the market of tradable homes is thinner than usual because of high negative equity," said Zillow's chief economist Stan Humphries. "This condition will change as home price gains pull homeowners out of negative equity and the market becomes more fluid."

Zillow's home value index was up 5.2 percent annually in November, but Humphries expects appreciation over the next twelve months of just 2.5 percent. He cites decreasing unemployment, rent increases, rising household formation and "essentially a five-year hiatus" in home building. (Read More: Most Affordable US Cities.)

Supply and demand, as they always have historically, will determine home prices going forward; unfortunately, both of those are currently too complicated and too economically sensitive to predict.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

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