Last month Lawrence Yun, chief economist for the National Association of Realtors, (NAR) was concerned that home prices were rising too fast. Prices were up 7.4% year-over-year. This month in Yun’s quarterly report he seems to be over his fears, even though prices are up 10% year-over-year.
WASHINGTON (February 11, 2013) – A growing number of metropolitan areas had higher median home prices in the fourth quarter, with the national price showing the strongest year-over-year increase in seven years, according to the latest quarterly report by the National Association of Realtors®
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Home sales are on a sustained uptrend, mortgage interest rates are hovering near record lows and unsold inventory is at the lowest level in 12 years..
Yun’s rationale behind his sudden optimism is a bit difficult to fathom.
Home sales are being fueled by a pent-up demand and job creation, along with still favorable affordability conditions and rents rising at faster rates. Our population has been growing faster than overall housing stock, so supply and demand dynamics are very much at play.” Yun added that more housing construction is needed to relieve some of the pressure in the market and keep home prices from overheating.
While household formation is off of it’s lows in 2010, it remains below average. In short, economic growth is insufficient account for the rise in prices. What has been driving prices is record low inventory. This is not because there are a shortage of houses out there. Vacancy rates remain above average, the shadow inventory has not disappeared and lenders are taking their time foreclosing on properties. This is because homes that in more normal markets would be listed are not being offered for sale.
Yun’s call for more houses to be built is puzzling. I suppose that sitting in his ivory tower, it appears to him that the only way to prevent another bubble is for builders to ramp up supply. That won’t prevent a bubble, but it might speed up bursting it.
The record price jumps are not a good thing, nor a sign of a strong market. It is a sign of increased speculation in the market, and speculative markets tend to end badly.