Home prices have been on the rise all year, and it looks as though values will end 2012 with a 4% gain. Still, builders, Realtors and mortgage bankers aren’t ready to pop the champagne quite yet.
So far, it appears the increase in prices is driven mostly by the low inventory of homes for sale, as opposed to demand from new buyers. Also, there’s a growing fear the increase in some markets is caused by investors who are seeking to flip units for a quick profit.
“There is some speculation in places like Phoenix and Las Vegas, particularly at the bottom end of the market,” said Dean Baker, co-director of the Center for Economic and Policy Research.
In a recent visit to Phoenix, Baker noticed the vacancy rate on single-family homes rising rapidly. “That’s consistent with the story of speculation,” he said, where people are looking make a big profit in six months to a year.
The demand doesn’t warrant such buying. “It won’t be a surprise to see to see prices fall again,” he said.
Prices in Phoenix rose 14% since June 2011, according to the latest reading of the S&P Case-Shiller house price index.
Standard & Poor’s reported that the Case-Shiller 20-city HPI rose 2.3% from May to June. It was the largest month-to-month increase in the 12-year history of the HPI. Overall, the 20-city index is up just 0.5% from June 2011.
The strong increase in values this year is driven more by a “big drop” in the number of units for sale as opposed to a large increase in buyer demand, according to a mortgage analyst at Citigroup Global Markets. “It is more of an inventory story than a demand story,” Robert Young told National Mortgage News.
The analyst noted that existing-home sales are up 10% from year ago. But the inventory of homes for sale dropped 24% since July 2011. This reduced the supply of lower-priced homes popular with investors and first-time buyers. Still, sales of higher-priced properties are on the rise. “As the housing market heals, sales growth is coming at higher-priced points,” Young said.
Based on the S&P Case-Shiller HPI, the Citigroup mortgage analyst is forecasting that prices will rise 4% this calendar year with “positive momentum likely to carry over into 2013.”
Meanwhile, the National Association of Realtors is complaining that low inventories and tight mortgage credit continue to be a drag on the housing market. Still, NAR economists are forecasting that existing-home sales will rise by up to 9% in 2012 and another 8% in 2013. Home values will increase 10% “cumulatively” over the next two years, the group believes. “Falling visible and shadow inventories point toward continuing price gains,” said chief economist Lawrence Yun.
Economists at IHS Global Insight also see existing sales rising 8% this year and 7% to 8% in 2013. But Global Insight economist Patrick Newport sees a “housing glut” as opposed to an inventory shortage. He says it’s going to take three to four years to unwind the shadow inventory of seriously delinquent loans before the housing market gets back to normal.
“The trend is still away from homeownership. You still have a lot of foreclosures in the pipeline and people who lose their homes will mostly end up renting,” he told NMN. “Prices are up but not by much compared to three or four years ago,” Newport said. Also, it’s still hard for many consumers to get a mortgage.
The co-director of the economic research center has a far different forecast than the Realtors. Baker expects prices will rise 4% to 5% from December 2011 to December 2012. But house prices typically rise in step with rate of inflation, which is presently running at about 2%.
Going forward, he sees a gradual increase in prices at about the inflation rate. And it will take nearly a decade before prices return to where they peaked in 2006. (The Case-Shiller HPI is down 31% since June 2006.)
That means it is going to be a “long process,” Baker said, for many underwater borrowers to get above water in terms of equity.
In terms of sales, he says existing-home sales have already recovered and will remain at the current rate of about 4.5 million sales a year. “We are gradually seeing home construction rise and sales of new homes will follow.”
