Home Prices Fly High

Housing prices posted their largest monthly gain in more than five years in a sign of an accelerating market that could provide a key boost to the economy.

The widely watched Case Shiller index rose 2.5% in April, the largest one-month gain in history. Prices are up 12.1% from a year ago, but still 26.2% away from the pre-crisis peak in July 2006.

 

It’s the better performing job market that gives people confidence and money to buy their homes now. “It releases a pent-up demand as people who have wanted to buy are increasingly able to do so,” said Bill Jordan, Senior Economist at Wrightson ICAP.

Prices are being pushed up by the lack of inventory of homes for sale, as homeowners are hesitant to sell. Many are still “underwater” which means there mortgage exceeds the price and therefore they can’t sell. “Other believe prices will only rise further, so there is no incentive to put their houses on the market unless they have to,” said Scott Anderson, Chief Economist at Bank of the West.

Also the construction rate of new housing units is still much lower than the long-time average. Only 696 thousand housing units (annual average) were completed in April 2013, which is much lower than the long-term average (see chart). Samuel Coffin, economist with USB, expects 1,3 million annually completed units over the next five years.

 

Another factor, however, was the rush to lock-in historically low interest rates. The typical 30-year mortgage rate increased by 1.1 percentage points since April as the Federal Reserve Board indicated it would taper off its bond purchases, which have driven interest rates so low. “Anticipation of higher interest rates and home prices is driving potential buyers to act now,” said Anderson.

The quickly rising interest rates will slow down the market. But that’s not necessarily a bad thing as this growth rate would be unsustainable on the long run. If the housing sector would continue to grow with two digits annually, we would risk running into a new housing bubble. “Continued rapid increases in mortgage rates will put a dent in housing affordability and will eventually reduce the pace of home price appreciation,” said Anderson.

For Coffin, the housing crisis is definitely over. “Housing is a strength rather than a weakness in the economy today,” he said. Instead of dragging the economy down, it currently adds wealth to households and helps GDP growth.

San Francisco leads the annual growth rate with 23.9% compared to April 2012. “We have been in a boom for the last 18 months,” said Jay Costello, president at Hill and Co real estate in San Francisco. What is normally an inventory of six months has been reduced to an inventory of just one month. Every single property gets between five or ten offers. But the rising prices didn’t affect all neighborhoods in the bay area the same way. “In the best parts of San Francisco, in a bad market our prices go down less. In a good market our prices go up more. It’s all about location,” he said.