Are home prices rising too fast?

WASHINGTON – Feb. 7, 2013 – In a historical context, home prices typically increase about 3 to 4 percent a year.

But in the years preceding the housing crash, prices in 2002 started soaring 7 percent a year, then 8 percent in 2004, and 12 percent by 2005, CNBC.com reports.

A “new bubble” may be forming, CNBC columnist Diana Olick writes. CoreLogic’s latest housing data shows home prices rose 8 percent in December year-over-year, the largest gain in more than six years. In some places, home prices are up by double digits from a year earlier; in Phoenix, prices are up 26 percent year-over-year.

Inventories of for-sale homes are very tight, and experts point to the tight inventories as a cause of rapidly rising home prices. Inventories of for-sale homes are at their lowest supply since May 2005, according to the National Association of Realtors®.

“The greatest concern in the market is the inventory situation,” says Lawrence Yun, NAR chief economist. “Even if we see an increase in the spring and summer, if home sales hold at the [current] level or even a five- to six-month supply, price increases are guaranteed. We don’t want to see rapid appreciation in prices faster than income.”

“Healthy housing market gains are historically driven by increasing employment and income, not by lack of supply,” reports CNBC reporter Diana Olick. “The latter leads to price bubbles.”

But low inventory is not the only cause of rising prices. In many markets, a flood of investor demand has also cause a shortage of listings. Investors are cashing in on once hard-hit markets by the foreclosure crisis. Many investors are hedge funds turning single-family homes into rentals.

However, quickly rising prices could cause these investors to take profits quicker than they originally planned by selling the rental homes now. That would add inventory to the market and slow price increases, Olick says.

“What we had thought were safer, long-term buys, may now turn into flips of the last decade,” Olick says. “The question will be if there are enough non-investor buyers out there to support those sales?”

But the home price gains may be sustainable, others say. Consumer confidence is increasing, employment is improving, and price gains may soon allow more homeowners who are seeing equity to once again trade-up.

Source: “Housing Market Already Shows Signs of New Bubble,” CNBC.com (Feb. 5, 2013) and “New Housing Fears: Home Prices Are Rising Too Fast,” CNBC.com (Jan. 22, 2013)

rising home values© Copyright 2013 INFORMATION, INC. Bethesda, MD (301) 215-4688

Reprinted with permission. Florida Realtors®. All rights reserved.

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