Just when you thought the era of real estate spin and kool-aid drinking was over, the market is now saturated with glowing reports about today’s rapidly appreciating home prices and the ongoing real estate recovery.
While current data does show a recovery in home prices, numerous analysts – including those at Capital Economics – are asking for some humility at this time … and for good reason.
It was only a short seven years ago when everyone was proclaiming the miracle of perpetually rising real estate prices. Unfortunately, we learned the hard way that unless everyone in America receives a 15% raise each year; it’s unlikely rapidly escalating home prices are justifiable long-term or truly market-based when studying the fundamentals of supply and demand.
But to be fair, today’s market does look rosier than in years past.
CoreLogic data shows April home prices up 12% annually and 3.2% higher when compared to March.
Still, these spikes are coming in the wake of a downturn that pushed the price floor much lower. The market is nowhere close to pre-crisis levels and still needs more organic growth in the form of move-up buyers and new homebuyers to classify as a more robust recovery.
Ed Stansfield, a chief property economist with Capital Economics, shares a similar view.
He calls the 12% per annum home price gain short-term relief for the housing sector, but advises against ambitious expectations.
"The lack of inventory on the market has been a key reason why house prices have made such rapid gains over the past year," Stansfield wrote in a research note.
"At 4.8 months, the time taken to sell the stock of homes for sale is close to an all-time low. However, as we pointed out last week, the sharp rise in home listings since the turn of the year may be an early sign that these inventory shortages may be beginning to ease."
If more inventory hits the market, home price gains could very well moderate later this year, Stansfield advised.
He’s also more aware of where the market has been — a factor that tends to mitigate excessively optimistic reports.
"All in all, it is important not to lose sight of the fact that despite the rapid gains of the past year, home prices in the U.S. are still over 20% below their previous peak," Stansfield said. "That suggests that there is some way to go before the risks of further house price gains outweigh the support that housing is lending to the wider recovery."