Housing prices are on a roll. After years in the doldrums, the U.S. residential housing market is experiencing consistent gains in prices, with the average home value up 4.1 percent across the nation in the past 12 months. The increase is raising concerns among economists about a potential housing price bubble as well as the impact of price increases on home affordability.
The gains came in the S&P/Case-Shiller Home Price Index. A smaller subset of cities surveyed notched a 5 percent gain during the same period. Earlier this month, the National Association of Realtors (NAR) reported that the median existing home price rose by 8.9 percent from 12 months ago, and that home prices have risen for 38 consecutive months.
While price gains are still short of those experienced during the bubble, some factors that lead to pricing bubbles are present, especially a shortage of single family home inventory. Although inventory rose in April from a 4.6 months to 5.3 months supply, that’s still below the 6 months of inventory that indicate a balance between supply and demand.
In addition, foreclosures and negative home equity are constraining the bottom of the market, where first time homebuyers typically gain a foothold in the market. Builders are building more homes, but most of those tend to be in the mid and upper ends of the market, rather than in the starter home market.
At this point, while individual markets are definitely overpriced and may very well already be in a bubble — such as New York and San Francisco — the rest of the country doesn’t seem to fit that description, at least not yet. Fears of home price affordability, especially on the lower end of the market, definitely have some basis.
The NAR does project that new home construction will increase significantly next year and mortgage underwriting standards will normalize, both of which could loosen up the market for first time home buyers and provide some relief on the affordability issue.