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Home Prices Rise, But Is It Too Much, Too Soon?

Across the nation we’re seeing home prices rebounding fast, with the latest data from CoreLogic showing that property values rose by an astonishing 8.3% in December, compared to one year ago. But though many will argue that these are encouraging signs, some detractors have suggest that prices may actually be rising too fast, giving rise to the possibility of a “new bubble” emerging in some markets.

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According to CNBC’s Diana Olick, one of the problems is that the rate at which home prices are rising is far outpacing what has always been considered normal. Historically, home prices have always increased at a rate of about 3% to 4% a year in a ‘normal’ economy, but some markets have seen increases that far outpace this ‘healthy’ level of growth – for example, Phoenix, Arizona, where prices have shot up 26% year-on-year.

What’s causing these price hikes? Experts suggest that lower inventories are one of the main driving forces, with lack of availability forcing prices up as buyers try to outbid each other for those ‘plum’ properties that remain. According to Olick, inventories are now at their lowest level since May 2005, citing data from the National Association of Realtors.

Lawrence Yun, NAR chief economist, states that this is indeed his greatest concern right now:

“Even if we see an increase in the spring and summer, if home sales hold at the [current] level or even a 5- to 6-month supply, price increases are guaranteed. We don't want to see rapid appreciation in prices faster than income,” stressed Yun.

The main worry is that, historically at least, healthy gains in the housing market have always been driven by rising levels of income and employment, as opposed to a lack of supply. In effect, the gains we are seeing now could well be unsustainable.

Also concerning is the impact that investors are having on markets, writes Olick. Some of the worst hit markets during the recession, such as Las Vegas, California, Florida and Phoenix, have been seized upon by investors looking to make long term profits by turning foreclosed homes into rentals. However, the danger is that as prices rise, some investors may look to cash in on their properties instead – but will there be enough non-investor buyers to support them?

Mike Wheatley

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at mike@realtybiznews.com.

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