How to Ensure Healthy Price Gains

Prices are increasing quickly, though that may not always be the most healthy development for the economy. Also, banks may soon loosen overly strict requirements, but a choke point remains in new-home construction.

The housing recovery is surpassing most expectations. Rising demand and many years of sluggish new-home construction have forced home prices to rise at a near double-digit pace in many parts of the country. The latest surveys from the National Association of REALTORS®, which looked at foot traffic at open houses and inquiries from potential sellers to real estate agents, continued to point toward too many buyers chasing too few sellers. Home prices should continue to rise this year and likely next year as well.

Fast-rising home values are clearly good for home owners, but price increases that are far in excess of income growth are not good for buyers and not a healthy development for the economy. However, it’s important to keep in mind that demand is moving ahead in spite of the stringent lending standards still in place. Fully one-third of buyers are using cash.

Consider what demand would look like if underwriting restrictions were dialed back to a more reasonable level. That’s finally a possibility for two reasons: Banks are sitting on piles of cash, and the quality of recently underwritten mortgages has been high. These conditions could persuade banks to start easing overly strict requirements. The additional demand in a more “normal” lending environment potentially would mean even faster price growth. The only way to tame excessive price jumps is for more inventory to reach the market. Investors could help here by selling properties ahead of their intended schedule to take advantage of rising prices.

The choke point today is from the slow recovery in new-home construction. Housing starts in March finally crossed the 1 million mark for the first time in five years. But 1.5 million new housing units are needed annually to keep home-price gains at a healthy, long-term level of around 3 percent to 5 percent a year. That balance seems unlikely this year as we will continue to see demand outstrip supply, fueling exorbitant price increases in some places.

PER realtor.og MAY 2013 | BY LAWRENCE YUN