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Capital Economics: What’s keeping home prices from rising even higher?

Home prices should be rising at double their current rate

Home prices have consistently increased around 5% year-over-year for the majority of the last two years, but this percentage could be severely off according to a new report from Capital Economics.

A new housing market update report from Capital Economics shows that given the current housing conditions, past experience suggests that house prices should be rising at double their current rate of around 5%.

Due to the lack of housing inventory, there are more buyers than homes available, which would typical lead to an much higher acceleration in house price growth than where it sits now

Currently, there is less than five months’ supply in the market, which looking at past data would normally be associated with house price growth of around 10% year-over-year.

So what’s causing this abnormality?

Homebuilder behavior.

As the report describes it, unlike homeowners, builders have a stronger incentive to secure a quick sale, rather than hold out for the highest conceivable price.

While new homes only make up 10% to 20% of total sales, making it strange for them to have such a great impact on home prices, the report said it suspects that builders play a greater role in influencing prices at times when the supply of existing homes is constrained.

Unlike home sellers, builders need to generate cash flow, and since sitting on an empty home is a cost, they are more willing to make a deal with buyers than existing homeowners.

Then as a side effect of this, Capital Economics said it limits the extent to which sellers of existing homes can up their asking prices even with their product in short supply.

And this isn’t the only area that homebuilders are wielding a lot of power in.

For the first time in the supply history of housing, there’s a giant new generation, Millennials, that’s not being served.

An article in TIME by Denver Nicks explained that the situation, to some degree, is a chicken-or-the-egg situation.

Nicks asked, “Are builders not catering to first-time homebuyers because the nation’s young adults aren’t likely to be purchasing? Or are young adults unlikely to be buying partly because there are relatively few homes that match their needs?”

Here’s where homebuilders currently stand in building more inventory. According to the April Census Bureau report, housing starts came in 1.7% below the April 2015 rate, reaching just 1,172,000. This was 6.6% above the revised March estimate of 1,099,000 but still off from last year's April numbers of 1,192,000.

The latest May numbers for housing starts are due to come out early Friday morning.  

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