Home prices are going up, but don’t call it a bubble just yet. Data from Thursday showed that home prices advanced 7.7 percent in the past year (through June) as fence-sitting homebuyers move to buy before prices continue to rise. A recent rise in mortgage rates is also spurring buyers to lock in rates before they climb further.
“When you start to see interest rates rise, people are going to want to jump in,” remarked Beth Ann Bovino, deputy chief economist at Standard & Poor’s. “All those people on the fence come back into the market. But that’s a good thing.”
This data echoes other reports of healthy gains in home sales and prices. The National Association of Realtors remarked last Wednesday that the median price of previously owned homes jumped 13.7 percent in the past year to $213,500.
The surge in home prices may have some homebuyers wondering if the market has gotten ahead of itself, although housing prices in most parts of the country appear to have plenty of room to move higher if the wider economic recovery remains intact.
West coast housing markets have seen the biggest gains. The Federal Housing Finance Agency report showed prices in June were 17 percent higher than a year earlier in the Pacific area (which includes California and Washington). House prices jumped 11 percent in the Mountain region, (Nevada and Arizona). The Middle Atlantic region (New York, New Jersey and Pennsylvania) had the smallest increase at only 2.5 percent.
Sales of previously owned homes, a much larger share of the overall market, picked up by 6.5 percent last month to the fastest pace since November 2009, according to the Realtors report. However, the inventory of homes for sale remains tight — just 5.1 months’ worth at the current sales pace. This has helped sellers and homebuilders boost their asking prices, as the tight supply is expected to continue to support prices.
“We have a number of locations where the next home sold may take as much as one year to deliver, because our backlogs are so big at individual communities,” said Douglas Yearly, CEO of luxury home builder Toll Brothers. “That’s when we raise prices.”
However, there are early signs that rises in prices and borrowing costs may be cooling demand: mortgage applications for home purchases and refinancing dropped for a second-straight week as rates rose, according to the Mortgage Bankers Association. Demand fell 4.6 percent in mid-August as the rate on a 30-year fixed mortgage rose to 4.68 percent, matching this year’s high mark. Rates have been rising since May, when the Federal Reserved hinted that it may begin tapering off its $85 billion in monthly bond purchases. That easy-money policy has been a critical stimulus in reviving the housing market from its collapse in 2007.
Yet, some industry experts believe that prices haven’t yet reached a point where they will cool demand, according to Capital Economics housing economist Paul Diggle, who prepared the report. “The most reliable measures still suggests that housing is undervalued,” he said.
Even if rising prices and rates don’t scare away potential homebuyers, the continued housing recovery will depend on the availability of credit, which tightened considerably after the wave of rogue lending that fueled the mid-2000s housing bubble.
Lenders are more careful than they were in 2007, but there are signs they’ve begun to ease their credit standards as they compete for borrowers, who, these days, are better able to take on a new mortgage payment. That will help the housing market better weather the ongoing rise in interest rates, according to S&P’s Bovino.
“We’ve had four years of cleaning up our balance sheets, getting our fiscal homes in order,” she said. “I think we do have the capabilities to cushion that blow (from higher rates).”
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