Home prices are expected to level off. This is based on two important indicators of home appreciation came out this month, both showing the same thing:  home price increases are slowing rapidly. Economists are forecasting continued slowdowns in appreciation, according to polls by Reuters, Zillow and others.

Hawaii is affected, but this is also a nationwide trend. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 4.7% annual gain in December, down from 5.1% in the previous month, and down from the six-percent-plus rates of increase reported one year ago. The 10-City Composite annual increase came in at 3.8%, down from 4.2% in the previous month. The 20-City Composite posted a 4.2% year-over-year gain, down from 4.6% in the previous month.

Why this is happening

Home appreciation is far lower than just two years ago. The slowdown was inevitable due to an unsustainable and widening gap between incomes and home prices.

Having low inventory of for-sale listings is a circular problem. Strong demand is created by those looking to buy, but owners are afraid to sell for fear they won’t find a new home in a low inventory, competitive market. This has resulted in weak home sales. Fast appreciation and record home prices are driving prices out of reach for many, particularly first-time home buyers.

Another important home price measure is the Federal Housing Financing Agency’s House Price Index (HPI). This covers only home transactions involving mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac. The FHFA Index of home prices showed a slowdown in the rate of home price appreciation.

It’s not all bad news

The economy is still benefitting from increasing home values. This means consumers have more spending power. U.S. homeowners are sitting on $5.9 trillion in tapable equity.

Historically high home price increases are not sustainable, and we can expect to see appreciation cut in half. But this may not look like the bubble of 2006. Home prices appreciation will slow- sharply in some areas.  Income ratios and soon-to-be-rising interest rates will drive a leveling off of home prices, particularly in expensive markets like Hawaii.