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Are U.S. home prices overvalued?

by  | Corporate
Posted:     Updated: Mar 6, 2017  11:59 ET
 
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Home prices rose robustly in most parts of the country to end 2016, and the pace of the gains has picked up again this year in many metro areas. This is a seller's market, but not all analysts agree on whether it has also become an unaffordable market.

Some housing economists have grown concerned about the high and rising sales prices in the West region of the nation, including California as well as in certain metros in Texas. Nobody has yet said the overall housing market is in a bubble, but some studies suggest that individual markets are overvalued and unsustainable. Other economists have pushed back on that idea.

Homes

“Home prices are rising, but the speed is not alarming,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, which publishes the Case-Shiller indices.

Case-Shiller's U.S. National Home Price Index posted an annual gain of 5.8 percent in December, up from 5.6 percent in November. The 10-city and 20-city composite indices rose year over year by 4.9 percent and 5.6 percent, respectively. All 20 cities posted year-over-year gains in December.

According to Blitzer, while the nominal gain in prices has averaged around 6 percent this year, the real price growth is closer to 3.8 percent when adjusted for inflation.

This exceeds the long-term average pace of 1.3 percent, but is within a normal range, Blitzer said.

Mark Fleming, the chief economist for title company First American Corp., told Scotsman Guide News last week that he doesn’t believe any market in the U.S. can be called unsustainable. That’s so because 30-year fixed mortgage rates are still more than 2 percentage points lower than they were a decade ago. In terms of real price growth, which factors the cost of a mortgage and incomes in an area, prices are still well below the last market peak a decade ago.

In real price-growth terms, for example, the median home price in San Jose, California — the nation’s most expensive housing market, with a median home price of over $1 million — is just 15 percent higher than the median price in that market in the year 2000.

“Even the most expensive cities today aren’t necessarily highly expensive in general terms,” Fleming said. With the rise in mortgage rates, homes are more expensive in real terms than they were just a few months ago, Fleming said, but that doesn’t mean that these markets are “unaffordable.”

One thing that economists do agree on is that inventories are too tight, and this is limiting choices and driving up prices. According to Fleming, the reason this is so is that existing homeowners have been reluctant to list their homes.

“A lack of inventory, I think, is clearly the challenge many markets will face this coming spring homebuying season,” Fleming said.

Economists have been worrying about the low inventories of homes for sale and rising home prices, but so far that hasn’t translated into lower home sales.

In January, both existing-home sales and new-home sales were up solidly over the December level and year over year. Existing-home sales were the strongest in a decade last month.

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Victor Whitman is chief reporter for Scotsman Guide Media. Reach him at (800) 297-6038 or victorw@scotsmanguidenews.com.

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Are U.S. home prices overvalued?

by Scotsman Guide Media | Corporate
Posted: Mar 6, 2017  11:57 ET    Updated: Mar 6, 2017  11:59 ET

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