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Homes Prices: Biggest Increase Since Housing Bubble Burst

Written By:
March 28, 2013 at 12:12 AM

Home Prices Gains January 2013

Home prices continue its upward march posting an increase 8.1% in January. The average price of a new home increase 3% to $246,800 over January 2013 and about the same amount compared to February 2012. According to the S&P Case-Shiller Home Price Index, the rise in home prices represents the biggest year-over-year increase in the last seven years.

After adjusting for seasonal factors, the median home price increased 0.1% in January compared to December.

Surprisingly, the uptrend did not break stride despite the latest Commerce Department report that shows a slight downturn of 5% for new-home sales in February. Nonetheless, sales rose 12% on a year-over-year basis.

Usually, seasonal factors come into play, which cause prices to slow down during the winter months, but that has not been the case.

What the Data Shows

The S&P Case-Shiller Home Price Index is one of the most closely watched indicators by economists, investors and policymakers. The index tracks home prices for existing homes in 20 metropolitan areas across the country.

The index figures show that the appreciation in home prices is a current across the nation as all 20 markets register year-over-year home price increases.

Here are the areas with the best year-over-year gains:

Homes prices have accelerated in every market with the exception of Detroit.

Concerns Regarding Inventory Shortage

Housing market analysts have expressed concern about a supply shortage of existing-homes for sale. The volume of existing homes for sale has plummeted to the lowest volume in decades. The lack of sufficient inventory has a direct correlation with the number of homeowners who have been incapable or unwilling to sell their homes.

Many of these homeowners have underwater mortgages—they owe the bank more than their home is worth or experienced a significant drop in the value of their homes over the past several years and want to try and regain some of the lost equity.

Until recently, the glut of foreclosures on the market caused a housing glut and made it financially impractical for home builders to construct new homes.

With the entry of cash-heavy large institutional and private equity investors swooping in to buy up thousands of foreclosures at a time, what at one time looked like an over-supply of existing home inventory—especially in the affordable price range-- has now turned into a housing shortage. Theses dynamics have fueled escalating home prices.

Better Economic News

Various economic data have been consistent in supporting contentions that the housing recovery is underway. Building permits and housing starts for single-family homes registered a double digit year-over-year increase in February.

Many builders have experienced a challenge hiring workers to meet the demand for new homes. New home construction activities form the basis that drives the U.S. economy.

Although, foreclosure-related activities have increased—initial filings, foreclosure auctions, and bank owned properties—this category distressed homes has dropped 25% versus the same period to last year. Low home mortgage interest rates, an improved employment outlook have also contributed to job situation have a more stable economy hopefully positioned for much needed expansion.

Appreciating home prices also put homeowners in a better position to refinance to low interest rate home mortgage. Reducing the amount of the monthly mortgage payment means households can redirect the money they save into buying more goods and services and helping to grow the economy. Consumer spending makes up 70% of all domestic expenditures.

Adjusting Price Predictions

In making their year-end predictions for 2013, many economists and housing market analysts predicted that home prices would increase at a slower rate compared to 2012. Subsequently, several economists and analysts have modified their predictions.

For example, Lawrence Yun, the chief economist for the National Association of Realtors, initially forecast a 4% increase in home prices for 2013. Yun changed his expectation to 7% due to the persistence of inventory shortages around the nation. Morgan Stanley economists also adjusted their estimate from a gain in the range of 4%-6% in 2013 to 6%-8%.

Mike Simonsen, the chief executive of real-estate analytics company Altos Research of Mountain View, California said that even these predictions may be “too low.” The housing market is “crazy hot right now," said Simonsen who believes home prices will increase as much as 10% in 2013.





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