S&P expects home prices to keep rising
Surging home prices throughout the country have spurred talk of a housing bubble, as many markets are still recovering from the last bubble bursting in 2007.
But Standard & Poor’s Ratings Services states that, although double-digit gains are ultimately unsustainable, we may not have reached bubble status quite yet.
Home price appreciation can be attributed to a number of factors, including historically low rates, property purchases by investors who are renting homes out and a shortage in home inventory. In fact, recently the S&P/Case-Shiller home price index hit an 11% year-over-year increase, from 8%.
Across the U.S., home prices are back to 2003 levels, yet they remain far from their 2006 peak. Lack of available inventory coupled with high demand has played a large role in this. In April, the sales of existing homes were up 9.7% year-over-year, while existing housing inventory dropped 13.6% from a year earlier, according to the National Association of Realtors.
Sadly, housing starts plummeted 16.5% in April after rising 1 million units in March for the first time in nearly five years.
Yet, despite the slow climb for starts, analysts anticipate that builders will begin to break ground in the next few months. Permits increased 14.3% to a five-year high of 1.017 million, indicating a bounce in starts.
According to homebuilder feedback, average selling prices have risen 11% so far this year, with several homebuilders seeing up to a 15% increase in average selling prices.
Additionally, home affordability, which is supported by historically low mortgage rates, is high, pushing buyer demand regardless of the modest job and income growth seen the past year.
Jumping eight points, the National Association of Home Builders’ sentiment index reached 52 in June, the largest one-month increase since September 2002 and its highest level since March 2006. The portion of the index that gauges expectations of future sales rose nine points to 61.
Fewer Americans own homes, reports the Census Bureau, who states that only 65% of Americans own a home, the lowest level in nearly two decades. This is down from the peak of 69.2% in June 2004 and reflects a strong increase in investor activity.
For example, Blackstone, a private-equity firm, reported acquiring approximately 26,000 homes. Investor purchases, which are typically made with cash, are helping to push up home prices. While some analysts see this as artificial, or at least unusual, property value support, it doesn’t seem this activity will lead to rampant exaggerating of the market.
The investor activity — which has been focused primarily in the hardest hit markets, such as Las Vegas, California and Florida — will likely cause prices to fluctuate a bit in certain areas of the country. However, analysts believe widespread volatility seems unlikely.
This activity is just one of many indicators that the housing supply could remain tight for some time. The banks that foreclosed on homes are reluctant to throw them back on the market until they can ensure a profit will be made.
As of now, the S&P baseline economic forecast expects an increase in total housing starts of about 28% this year, to 1 million units. In 2014, another 29% increase is anticipated, with starts reaching 1.3 million units.
The 50-year historical average is about 1.5 million homes.
While more Americans are applying for home loans right now, mortgage rates are also on the rise, reaching their highest level in more than a year.
S&P states that U.S. home prices are relatively low compared to historical values. Prices remain 28% lower than their July 2006 peak.
Additionally, housing remains undervalued about 8% based on the price-to-income ratio, which takes into account the median sales price of a home relative to median annual incomes. The typical median home in the U.S. costs 4 times as much as the median annual income. It's now at 3.7 times
Overall, S&P expects that the current pace of home prices gains will not last for long; however, it’s too soon to call this a bubble. In fact, as home values are still below their pre-recession peaks, home prices could continue to rise throughout the year.