Supply Squeeze Forcing House Prices Even Higher

Rising home prices amid tightening inventories mean it’s a good time get that home ready for selling, right?

Not so fast, said First American Financial Corp., Santa Ana, Calif.

“If everyone sells, the supply squeeze would ease,” said First American Chief Economist Mark Fleming. “However, homeowners may not be putting their homes on the market because they’re wary of the risk of selling when others don’t–the inability to find another home to purchase at the right price.”

The company’s monthly Real House Price Index reported real house prices increased y b0.7 percent between February and March and by 11.5 percent year-over-year. Consumer house-buying power–how much one can buy based on changes in income and the interest rate–decreased by 0.4 percent between February and March and fell by 5.2 percent year-over-year.

The report said real house prices are 32.5 percent below their housing-boom peak in July 2006 and 9.3 percent below the level of prices in January 2000.
“Real, purchasing-power adjusted house prices are rising even faster than unadjusted home prices alone, primarily due to declining consumer purchasing power,” Fleming said. “Strong Millennial demand, a limited supply of homes for sale and higher mortgage rates have all combined to impact the affordability of homes compared to a year ago.”

The report said states with the greatest year-over-year increase in real prices were Wisconsin (+17.0 percent), Michigan (+16.7 percent), Alabama (+16.0 percent), New York (+15.2 percent) and Colorado (+15.0 percent). States with the smallest year-over-year increase were Nebraska (+1.2 percent), Tennessee (+4.3 percent), Massachusetts (+4.4 percent), Connecticut (+5.0 percent) and Montana (+5.2 percent).

Among metro areas tracked by First American, markets with the greatest year-over-year increase in real prices were Jacksonville, Fla. (+18.8 percent), Milwaukee (+18.3 percent), Charlotte, N.C. (+16.6 percent), Denver (+15.4 percent), and Seattle (+14.9 percent). Markets with the smallest year-over-year increase were Hartford, Conn. (+4.6 percent), Pittsburgh (+5.0 percent), Virginia Beach, Va. (+6.2 percent), San Francisco (+6.5 percent), and Riverside, Calif. (+7.5 percent).

First American also released its Potential Home Sales model for April, noting potential existing-home sales decreased to a 5.69 million seasonally adjusted, annualized rate, a 0.2 percent decline over last month’s revised data. This represents an 89.3 percent increase from the market potential low point reached in December 2008.

First American said the market potential for existing home sales fell by 0.1 percent compared with a year ago, a decline of 5,000 sales. It said currently, potential existing home sales is 674,000, or 11.8 percent below the pre-recession peak of market potential, which occurred in July 2005.

“Demand for existing-homes remains strong, as positive economic conditions and the demographic tail wind of Millennial demand continues to grow,” Fleming said. “Meanwhile, sellers are increasingly unwilling to list their homes for sale. The market faces a ‘prisoner’s dilemma.’ If everyone sells, there will be plenty of supply, but the risk of selling when others don’t, the inability to find a home to purchase at the right price, is preventing homeowners from putting their homes on the market. This ‘prisoner’s dilemma’ in housing is restricting supply, causing increased house price appreciation and falling affordability.”