Home prices increased by 9.3 percent, their largest annual margin in nearly seven years. But experts warn that a backlog in some markets could keep home prices low for the foreseeable future.
The good news for the housing market just keeps on coming. The latest report of the S&P/Case-Shiller Home Price Indices showed that average home prices for 20 cities increased by 9.3 percent for the year ending in February 2013. That same index rose 0.3 percent between January and February of this year. It was the biggest annual increase in residential real estate prices since May 2006.
It’s yet further evidence of the trend for the past year or so – nationally, the housing market recovery is speeding along nicely. It’s still a long way off, but developments over the past year have the market at least moving toward the direction of “normal” after years of depressed conditions.
“Despite some recent mixed economic reports for March, housing continues to be one of the brighter spots in the economy,” David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices, wrote in the report. “The 2013 first quarter GDP report shows that residential investment accelerated from the 2012 fourth quarter and made a positive contribution to growth. One open question is the mix of single-family [homes] and apartments; housing starts data show a larger than usual share is apartments.”
What's driving prices up? Analysts point to lean inventories, low interest rates, a rise in employment, and a drop in the share of foreclosed homes (which typically sell at a reduced price).
“In some places, a fifth factor, one that is easy to describe, but hard to measure and forecast, is starting to play a role in places with double-digit growth – expectations," Patrick Newport and Stephanie Carol, economists for the research firm IHS Global Insight in Lexington, Mass., wrote in an e-mailed analysis. “For example, some want-to-be homebuyers are entering the market now instead of later because they are afraid that prices will shoot up if they wait. Their expectations, which become self-fulfilling, are magnifying price increases.”
Of the 20 cities covered by the Case-Shiller index, 16 saw price increases accelerate over two consecutive months during the past year, while Detroit, Miami, Minneapolis, and Phoenix saw their rise in prices ease slightly. In Phoenix’s case, the slowdown came on the heels of an impressive 23 percent average price increase from 2012. (Before that, the housing market there was so depressed it really had nowhere to go but up).
Phoenix joined Atlanta, Las Vegas, and San Francisco among the cities with the biggest year-over-year price increases. “Atlanta recovered from a wave of foreclosures in 2012 while the other three were among the hardest hit in the housing collapse,” Mr. Blitzer wrote. “At the other end of the rankings, three older cities – New York, Boston and Chicago – saw the smallest year-over-year price improvements.”
Despite the good news, many experts warn not to expect a boom just yet, especially until a backlog of inventory has been cleared out of certain markets.
“While recent results have been considerably better than those seen earlier in the cycle, we continue to believe that the large supply overhang of existing homes (factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time,” Joshua Shapiro, chief US economist for MFR Inc., wrote in his analysis of the report. “Also, with foreclosures now starting to ramp back up, increased sales of distressed properties are likely to have a downward influence on price data, just as a reduced number of such sales in recent months likely had a beneficial effect.”