Forget Bubble Talk for Now, Home Prices See Largest Gains In 7 Years

The fact that the housing market is improving is no longer up for debate. The argument now is over the character of the recovery, and whether the influence of home speculators is a danger.

The S&P/Case-Shiller house-price index of 20 big metropolitan areas rose a seasonally adjusted 1.1% in March from February, the largest monthly gain since April 2006, and was up 10.9% from a year earlier. Existing-home sales have been higher than year-earlier levels for 22 straight months. They recently reached their highest monthly level since government home-buyer tax incentives expired in November 2009.

Home prices are being flattered by a strong-supply-demand mismatch. New-house construction plunged far below normal levels in the deep housing bust, as pent-up demand for single-family dwellings built up amid record-low mortgage rates, foreclosure-plagued markets and weak labor conditions. Builders in some markets report being able almost to name their price on newly constructed houses.

The pipeline of available supply is also badly clogged. Even with the recent price gains, a quarter of U.S. homeowners remained underwater in the first quarter, owing more on their mortgages than their homes are worth, according to real-estate tracker Zillow Inc. An additional 18% have low enough home equity that they wouldn’t have enough for a down payment on another house if they sold, suggesting that more than 40% of homeowners are virtually trapped in their houses.

Given this backdrop, speculative house-flipping activity has surged back, reminding some observers of the sort of reckless behavior that marked the hazardous excesses of the housing-bubble that crested in 2006.

As the Wall Street Journal notes, the number of homes in California this year that were bought and sold within six months – a proxy for flipping volume – reached the highest level since 2005. Home prices in the Bay Area are up more than 20% on average over the last year, stoking speculative fires. Ads for house-flipping seminars are all over the radio and TV. On Wall Street, meantime, housing-related stocks are among the hottest leaders of the market’s run to new highs this year.

This pickup in fast-money house trading fueled by ultra-cheap credit furnished by the Federal Reserve and government-backed lenders certainly raises fair questions about whether the rebound in housing is helping the broad public, whose incomes have been stagnant amid the boom in investment markets and high-end consumption.

Yet it’s far too soon to call this pattern a re-run of the housing bubble that played such a central role in the financial crisis and deep recession of 2008 and 2009. For one thing, the absolute level of prices remains far below its peak. Even after the gains of the past year, the S&P Case-Shiller index remains nearly 30% below its peak in mid-2006. And, as noted, there are several unusual factors restraining the inventory of homes for sale, creating an energetic rush for available properties in the short term.

Despite the wary talk of bubble risk creeping back into residential real estate, only continued increases in prices will stabilize housing supply and demand at a healthy level, while refreshing consumer buying power broadly. As prices rise, more owners will get their heads above water, making it financially feasible for them to list their houses and buy another one.

And, as noted in the attached video, houses are the main collateral for consumers in the U.S. economy. As their value rises, debt becomes more manageable and spending picks up. The cycle, in this way, is constructive for the overall economy, until and unless it reaches a dangerous extreme – and we’re not there yet.



Source:  Yahoo!