September home price data marks the 11th straight month of moderating gains. Nationally, yearly gains decreased from a high of 11.7percent in October 2013 to just 7.8percent through September 2014, ClearCapital reported in its HDI Market report.

Distressed inventory is no longer reinforcing a strong housing market recovery. Discounted distressed deals continue to dry up, down from a national high of 38.4percent in 2011 to just 16.5percent in September 2014. While this is generally a positive sign, distressed sales helped drive the investor demand that kick started the recovery. Historically, we’ve observed rising prices as distressed saturation declined. While reduction of distressed saturation is a healthy move for markets long term, over the short term it removes a key demand segment at a time when full buyer momentum has yet to be established. The correlation between drastic declines in price gains and declines in distressed saturation is most visible in the West. Distressed saturation was at an all-time high of 50.5percent in 2009 falling to just 12.6percent in September 2014. As distressed saturation fell, so did price gains. Yearly price gains in the West have fallen to 10.9percent. This nearly 50percent drop in price gains since October 2013 is in sync with declines in distressed saturation.

“Perception is reality — for consumer confidence in housing. Future home price gains are more dependent on owner occupied purchases as the rising price floor and dwindling discounted deals leave investors with fewer opportunities. Owner occupied demand is in part driven by consumer sentiment, among other key drivers, like jobs. While consumer sentiment levels reached a 14-month high in September, according to the University of Michigan’s Consumer Sentiment index, momentum has tempered — like home prices. Consumer sentiment yearly growth rates have softened seven percentage points over the last seven months. Each of the last two times consumer sentiment rates have seen negative yearly changes, prices have declined (see graph 1). As housing seeks stability, moderating rates of consumer confidence and price gains foreshadow a third potential dip,” said the report.

“Heading into fall, home price gains continue to drop,” said Dr. Alex Villacorta, vice president of research and analytics at Clear Capital. “September marks the 11th month of moderating gains with home price levels back in line with long run averages. With less fuel stoking investors’ fire and the consumer yet to feel confident in the market, we expect at best either a return to pre-bubble norms or a departure into negative territory.