Is housing on a 'sugar high'?

The strong home price increases of recent months are raising questions about whether a new housing bubble is on the way. But analysts still see problems ahead.

Apr 8, 2013

 

Just a few years ago, no one could have imagined that we’d be writing headlines about rising home prices. The evil "shadow inventory" loomed, and the chance that your underwater home would peek its head above the surface any time soon was slim.

But real estate is ever surprising, and just a few years after the real-estate bust and plunging values, home prices are rising again nearly everywhere in the United States. "Home prices are on a tear – thanks to the Fed," The Wall Street Journal wrote in Monday’s editions.

The rising prices mask some of the volatility that still exists in the market. First-time homebuyers have yet to come back to the market in large numbers, partly because they can’t get a mortgage in today’s environment. Many homeowners in hard-hit areas still have homes that are double digits under water. Much of the demand for homes is coming from investors.

The WSJ noted "murmurs of concern that the Federal Reserve's campaign to reduce interest rates could be giving the housing market a sugar high." But the Fed may not be the only culprit. These are the reasons the WSJ lists for rising prices:

• The number of homes for sale is at a 20-year low. That is partly because few new homes have been built in the past four years. Would-be sellers are still hesitant to sell at prices well below 2006 levels or fear they can’t get a mortgage to buy another home. And investors are scooping up much of what is offered for sale.
• Demand is rising. Investors are playing a major factor, but rising rents have encouraged more first-time buyers to enter the market.
• Low mortgage rates have increased purchasing power by one-third. At a 6.1% interest rate, a monthly payment of $1,000 will get you a $165,000 mortgage, The WSJ calculated. At a 3.5% rate, you can borrow $222,000 and still keep your payment around $1,000.

Are we heading for a new bubble? Experts interviewed said no. In fact, things may get worse, and the inventory of homes for sale is likely to rise soon.
"This is not a 2005 market," Rick Sharga, executive vice president of Carrington Mortgage Holdings, said at the real-estate expo in Dallas, as reported by Housing Wire. "A lot of what’s driving home-price increases is lack of available inventory. … Very few markets are anywhere near where we were at the peak."
By Teresa at MSN Real Estate