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A new bubble forecasted in key real estate markets

Rising home prices may be disguising an uncomfortable truth: homeowners are not recovering as fast as home prices.

Fitch Ratings analysts suggest skyrocketing prices in key markets are doing more harm than good when analyzed next to other economic data.

Consequently, recent home price gains could stall or even reverse the housing recovery, Fitch suggested.

"In many markets, fundamentals are improving as unemployment rates continue declining, while low prices and low interest rates have affordability high," analysts for the credit rating agency explained.

"However, especially in cities that never fully unwound the mid-2000s bubble, rapidly increasing price levels are a potential cause for concern." 

Not surprisingly, many of these areas are in California, which has seen price increases of 13% in the past year.

In Los Angeles, prices are up more than 10% in the past year despite a stubborn unemployment rate that is well above 10%. Not to mention, real estate incomes have declined over the course of the past two years.

On a similar note, CoreLogic noted earlier this month that residential investment and rising home prices are highly contingent on the dynamics of the local economy. 

When looking at price declines experienced from peak levels set prior to the downturn, the western region – including California – performed the worst with steeper price declines.

Several factors are combining to form an environment supportive of brisk home price growth, but few are capable of providing long-term support to sustain the recent pace of improvement, Fitch added.

For the most part, restricted housing supply and bolstered demand are pushing prices higher.

"We believe this level of housing demand is likely to abate once the pent-up demand is satisfied," Fitch analysts explained.

They added, "The supply is also artificially low, as recent regulations have limited the pace of foreclosure sales and the large percentage of underwater borrowers continues to hope for future price increases to be able to sell their homes at a profit."

CoreLogic released a report Wednesday, explaining that foreclosure activity continues to wane across the nation, but problem areas still remain.

"Six states have year-over-year declines in the foreclosure inventory of more than 40%, and in Arizona and California the year-over-year decline is more than 50%," said Dr. Mark Fleming, chief economist for CoreLogic.

Even so, the recovery remains bifurcated with judicial foreclosure states maintaining the highest foreclosure inventory rates while judicial states continue to work through their distressed pipelines.

The supply-demand imbalance is even more pronounced in regional markets, which are experiencing strong institutional and retail bids for rental properties. 

For instance, the low rates and steep drop in prices, combined with a decline in homeownership, have attracted an estimated $8 billion to $10 billion of new capital to the sector, the report said.

As a result, many markets have a large number of buyers vying for a limited number of properties.

cmlynski@housingwire.com

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