Monday, August 26, 2013

The Train has left the Station!

According to Industry reporting, home prices are going up, up, up, but it’s not a bubble just yet. The surge in home prices over the past year may have some home buyers wondering if the market has gotten ahead of itself. Rising interest rates aside, housing prices in most parts of the country appear to have plenty of room to move higher if the wider economic recovery remains intact. The latest data on price gains show home prices advanced 7.7 percent in the year through June, a rise that has fed on itself as fence-sitting home buyers move to buy before prices rise further. 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, which included Nevada and Arizona. The Middle Atlantic region -- New York, New Jersey and Pennsylvania -- had the smallest increase, at 2.5 percent. The government data echoes other reports of healthy gains in home sales and prices. The National Association of Realtors said Wednesday that the median price of a previously owned home jumped 13.7 percent for the year ended in July to $213,500. A recent rise in mortgage rates is also spurring buyers to lock in rates before they climb further. "When start you see interest rates rise, people are going to want to jump in," said 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." Higher borrowing costs could eventually price some buyers out of the market and slow the pace of home sales. Sales of new single-family homes dropped sharply in July to their lowest level in nine months, the Commerce Department reported Friday. Sales dropped 13.4 percent to an annual rate of 394,000 units, and the government also revised sharply lower its estimate for home sales in June. 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. The inventory of homes for sale remains tight – just 5.1 months' worth at the current sales pace – which has help sellers and homebuilders boost their asking prices. After a long drought in new home construction, that 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 price." There are early signs that the rise in prices and borrowing costs may be cooling demand. Mortgage applications for both home purchases and refinancings dropped for a second straight week as rates rose, according to the Mortgage Bankers Association. Demand fell 4.6 percent in the week ended Aug. 16, as the rate on a 30-year fixed mortgage rate rose to 4.68 percent, matching this year's high mark. Rates have been rising since May, when the Federal Reserve first signaled 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 historic 2007 collapse. The continued pickup in the pace of home sales and prices will depend heavily on whether the job market continues its slow recovery and incomes continue to rise. That disposable income represents the buying power required to fuel the housing market’s continued recovery. And despite the recent jump in prices, homes in most local markets remain affordable by historical standards. One of the most widely used measures – the Realtors affordability index – stood at 178 in June – down from a peak of 200 during the depths of the housing bust – but well higher than average levels. (The index, which factors in prices, incomes, borrowing costs and other variables, shows that a family with the median national income has 178 percent of the income needed to qualify for a mortgage that covers 80 percent of a median-priced house.) Other measures indicate that, despite rapid gains, homes are reasonably valued, according to a research note from Capital Economics. After the sharp declines following the housing bust, home prices have yet to reach levels in line with the long-term trend since 1975, according to the report. Prices are some 15 percent below that trend as measured by the Case-Shiller price index and 11 percent lower based on the FHFA's data. And the cost of buying a house is still cheap in relation to the cost of renting, suggesting prices haven't yet reached a point where they will cool demand, according housing Capital Economics housing economist Paul Diggle , who prepared the report. "The most reliable measure still suggests that housing is undervalued," he said. Even if rising prices and rates don't scare away potential home buyers, the continued housing recovery will depend on the availability of credit, which tightened considerably following the wave of rogue lending that fueled the mid-2000s housing bubble. Lenders are much choosier than they were six years ago, but there are signs they've begun to ease up a bit on credit standards as they compete for new borrowers. And after paring down a large pile of debt accumulated during the credit boom, those potential buyers 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 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)."