S&P/Case-Shiller Home Price Index: Does it Show a Rebound or New Bubble?



The latest S&P/Case-Shiller Home Price Index covering 20 major cities shows a year on year increase in home prices of 12.1%. Month on month, 13 of the 20 cities posted increases above 2% with San Francisco leading at 4.9%. This is the highest monthly increase in the history of the S&P/Case-Shiller Home Price Index.

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While experts across the industry are pleased to see prices once again on the upswing, such dramatic growth has to bring into question whether or not it is healthy growth or the emergence of yet another bubble that will burst.

Where Prices are Coming From

Consideration must be given to the fact that at the 2006 hight of home prices, they were considered much to high based on income, employment and other variables at the time. At that time, annual appreciation was running at 10.1% in the fastest growing markets.

But it’s a complicated picture. On average, these markets lost between 30% to 40% of value when the bubble burst in 2008. The most dramatic drops in value were close to 68%. What happened is the market over corrected. Today’s rapid growth in prices is certainly a rebound from that over correction.

Where the Real Estate Market is Heading

Mortgage rates are inching up but buyers are still entering the market. The Federal Reserve is currently clearly in charge of interest rates and has kept them at historic lows for a couple of years. However, for the first time since the recession, the Fed recently indicated it will slowly be releasing its strangle hold on interest rates.

As interest rates begin slowly rising, it will temporarily bring more buyers into the market to lock in the low rates. The fact that many under water mortgages are keeping homes off the market has turned what a couple of months ago was a buyers’ market rapidly into a sellers’ market. As long as the economy continues to grow, the result will be a rapid rebound in home prices.

Without a crystal ball, it’s impossible to know exactly where the real estate market is heading over the next couple of years. Ideally, there will be several months to a year of large increases in prices until most of the under water mortages are again healthy. Then a sufficient number of homes will come onto the market to stabalize prices at a point of equalibrium between sellers and buyers. But that too is always a temporary market condition.

 

Brian KlineAbout the author: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.