Home Prices Spur Talk of ‘Overheating’

Recent home price reports continue to fuel speculation that some housing markets are overheating.

Redfin, Seattle, said home prices increased 8.8 percent year over year in February, amid flat sales and continued tight inventories.

Redfin reported the median sale price rose to $285,700 across markets it serves, the strongest February for price appreciation since March 2014. February also marks six years, or 72 consecutive months, of year-over-year price increases since the market bottomed out and began to recover.

The report said February home sales were nearly flat, up just 0.4 percent compared to last year. February saw an 11.4 percent decline in the overall number of homes for sale, marking the 29th consecutive month of year-over-year supply declines.

However, buyer demand remained strong and market speed continued to increase. The typical home that sold last month went under contract in 53 days, a week faster than one year prior. More than one in five (21.1%) homes that sold last month went for more than their list price, up from 19.6 percent last February. Of the offers Redfin agents wrote for their clients in February, 56 percent encountered competition compared to 58 percent last February.

“Mortgage rates pushed upwards in February to the highest levels in nearly three years as home prices increased by their fastest pace since March 2014,” said Redfin Chief Economist Nela Richardson. “A growing economy, healthy buyer demand and low inventory drove the ramp up in prices last month. Combining even slightly higher rates with price growth this strong will make it even more challenging for first-time buyers to find affordable homes to buy this year.”

The good news for sellers, Richardson said, is modest rate increases are unlikely to curtail buyer demand. Just 6 percent of respondents to a survey commissioned by Redfin said they would cancel their home buying plans if rates rose above 5 percent.

Redfin reported the median value of off-market homes was $283,300, as measured by the Redfin Estimate, up 8.9 percent from last year. Nearly 60 percent of homes on the market in February were priced above their Redfin Estimate value, with a Redfin-List-to-Estimate Ratio of 100.3 percent, indicating that sellers are slightly overpricing their homes.

Redfin reported Seattle as the fastest market, with half of all homes pending sale in just eight days, down from 12 days from a year earlier. Denver and San Jose, Calif. Followed at nine and 10 median days on market, respectively, followed by Oakland (13) and San Francisco (14).

The most competitive market in February was San Jose, where 83.1% of homes sold above list price, followed by 74.4% in San Francisco, 67.5% in Oakland, 54.8% in Seattle and 44.4% in Tacoma, Wash.

Meanwhile, Fitch Ratings said rising mortgage rates are not likely to end the upward trajectory of U.S. home prices overall, though the rate of price growth is likely to slow in some markets throughout the country.

Fitch noted fixed mortgage rates are likely to rise further–the Mortgage Bankers Association last week reported 30-year fixed mortgage rates hit 4.69 percent, the highest level since January 2014. However, Fitch Managing Director Grant Bailey said home price growth is likely to remain solid nationally in the near term due to strong economic growth and tight supply.

“Home prices have historically moved more in line with unemployment and income growth than with movements in mortgage rates,” Bailey said. “With unemployment hovering at its lowest level since 2000 and GDP growth expected to remain strong through next year, these key indicators bode well for future home price growth nationally.”

Fitch reported several “overheated pockets” in the U.S., mostly in the West. Topping the list are Nevada, Oregon and Idaho (all 15-19 percent overvalued), while previously sustainable markets such as Atlanta, Denver, Utah and Washington (now 5-9 percent overvalued) have become “a bit frothy” over the past year.

“Overvalued markets are more likely to experience a slowdown in price growth, or a price correction,” Bailey said.

CoreLogic, Irvine, Calif., said according to its Market Condition Indicators data, an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 34 percent of metropolitan areas have an “overvalued” housing market as of January. Twenty-seven percent were “undervalued” and 39 percent were at value. When looking at only the top 50 markets based on housing stock, 48 percent were overvalued, 14 percent were undervalued and 38 percent were at value.