Western Markets Drive Higher Home Prices

Rising demand for new and existing homes combined with unusually lean inventories of homes and lots have pulled home prices higher. Wells Fargo Securities, Charlotte, N.C., said western states have driven much of that growth.

“While prices have risen rapidly over the past few years, price appreciation has been the greatest in only a handful of metropolitan areas,” said Wells Fargo Securities Senior Economist Mark Vitner in a recent Housing and Market Commentary. “Markets with rapidly appreciating home prices have also tended to experience exceptionally strong economic growth over the past few years.”

Many of these rapidly growing areas are in the West, including Seattle, Portland, San Francisco and Denver (site of the upcoming MBA Annual Convention & Expo). “These markets have unique characteristics that have exerted even greater pressure on home prices,” Wells Fargo said. “In addition to growing rapidly, developable land is unusually scarce in all of these areas and most also tend to have restrictive land-use laws, which make the supply of housing even more inelastic.”

To compound the issue, Vitner noted, many of these markets are also seeing an influx of foreign investment, which boosts demand even further above what the strong economic fundamentals would alone.

“Rapid home price appreciation in the West generates an outsized impact on value-weighted price indices, like the S&P CoreLogic Case-Shiller, because so many western markets are perennially so expensive,” Wells Fargo said. “Seven of the 10 highest-priced metropolitan areas are in the West, and the West accounted for 30.6 percent of the value of the S&P Case Shiller Index in 2010, despite accounting for just 20.4 percent of the nation’s households.”

Earlier this week the National Association of Realtors reported median prices of existing homes rose to record high in June, climbing to $266,200. Most other measures of home prices are either at or near record highs.

The report noted, however, while demand for new and existing homes combined with unusually lean inventories of homes and lots have pulled home prices higher. Even though home prices have recovered on a nominal basis, prices remain almost 15 percent below previous highs on a real, inflation-adjusted basis. First American Financial Corp, Santa Ana, Calif. reported real house prices are 34.2 percent below their housing-boom peak in July 2006 and 11.5 percent below the level of prices in January 2000 (see Lede Story above).

In addition, Wells Fargo noted home price appreciation has not been evenly spread throughout the country. Only 41 of the nation’s 100 largest housing markets have seen prices surpass their previous nominal peak and even fewer markets have seen prices fully recover in real terms

“The strongest growth has been concentrated in a handful of markets, mostly in parts of the country with a vibrant tech sector,” the report said. “These areas have tended to experience strong job growth, increased population inflows, soaring rents and robust home price appreciation. These increases are somewhat misleading. Vast areas of the country have seen home prices recover much less.”

The report also noted rapid appreciation in home prices in Denver and Portland is pricing out many potential home buyers. “Prices have risen much faster than income,” the report said. “Median home prices in Denver are now 6.6 times higher than after-tax per capita disposable income, and the home price-to-rent ratio is also at an all-time high. Denver’s more muted home price decline during the recession has enabled this ratio to easily surge past its previous high. The high multiple at which homes are selling relative to incomes has made for an even greater shortage of affordable housing options in Denver, which has seen an influx of young job seekers in recent years lured by the region’s highly sought after lifestyle and burgeoning tech sector.”

The report said rapid home price appreciation being seen in much of the West has not been present in much of the rest of the country. Moreover, home price appreciation has moderated in many markets over the past year, including Chicago, New York City and Washington, D.C.

“The moderation in price gains in these markets, however, is being hidden in large gains in the overall index, driven primarily by huge price gains in many western markets,” Wells Fargo said.

And then there’s the “B” word. “As to the question of whether the resurgence in home prices in the West is a harbinger of another housing bubble, the jury is still out,” the report said.