By Laura Kusisto
The U.S. housing market's red-hot recovery from the depths of
the crash five years ago is fueling concerns among economists and
real-estate brokers that home prices are overheating.
A dearth of new construction and strong demand from buyers are
pushing up prices twice as fast as the rate of income growth, the
latest data show, a level economists said is unsustainable.
The S&P CoreLogic Case-Shiller U.S. National Home Price
Index released Tuesday showed that in February home prices rose
5.8% from the same month a year earlier. That put prices nearly 40%
above their level at the bottom of the housing crash in February
2012.
At the same time, incomes rose just 3% in February from the same
month a year earlier, and are up 12% since February 2012, according
to the Labor Department.
Some local markets have experienced extreme swings. Home prices
in San Francisco have vaulted 98% from their low point during the
bust and now stand nearly 7% above their earlier record in 2006 at
the height of the previous housing boom.
In Dallas, home prices have risen by 52% from their low during
the recent bust and are now 35% above their previous high. In
Denver, prices are now 59% above their previous lows and 36% above
their previous high.
In some markets, bidding wars are breaking out. Agents said some
buyers are kicking in extra cash when properties don't appraise for
the asking price and even waiving their right to home
inspections.
"It can't be sustained," said David Berson, chief economist at
Nationwide Insurance and a former chief economist at mortgage giant
Fannie Mae, of the frenzied buying. "It can't go on forever."
During a bubble fueled by low interest rates and easy access to
credit, home prices soared to highs in 2006 before tumbling 27%
over the following six years.
One of the main drivers of the current price gains is the lack
of home construction. Labor shortages, zoning regulations, a lack
of available land and caution among builders have kept a lid on
construction activity in recent years. The supply of homes for sale
in March was down 6.6% from a year earlier, the National
Association of Realtors reported last week.
Now, even as the nine-year anniversary of the current economic
expansion approaches, the level of home construction relative to
the number of U.S. households is at its lowest level since the U.S.
Census Bureau began tracking such data in 1957, according to an
analysis by the Federal Reserve Bank of Kansas City reported
earlier this month.
To be sure, there are few signs of an imminent housing bust that
would lead to steep national declines in home prices, economists
said. Unlike the last boom, lending standards are stricter, and
many buyers have pristine credit scores and are putting down large
down payments, agents said.
What's more, while prices have risen rapidly over the past
several years, that is partly because they were making up ground
lost during the bust.
With little risk of a supply glut in the near future, economists
generally expect prices to continue rising quickly in most markets
for a couple more years, if the economy keeps expanding.
They said it is more likely that overheated markets are headed
for a long period of flat or slightly declining home prices,
especially if mortgage rates rise or job growth slows, but not an
outright crash.
The market "is not going to burst, it's going to contract" with
falling sales volume, said Nela Richardson, chief economist at
Redfin. "You might still see what looks to be a robust market
because prices are really strong, but that doesn't mean it's a
broad market."
Nonetheless, home prices are starting to look frothy for the
first time in years. Nationally, homes are about 4% overvalued,
meaning prices are slightly above the long-term trend line between
household incomes and mortgage costs, according to Mark Boud, chief
economist at Metrostudy, a housing research firm.
Some markets are in trickier territory. The Denver market is 8%
overvalued, while the Bay Area is 8.5% too pricey based on Mr.
Boud's analysis.
Most overheated markets have supply shortages. Nationwide, there
is a shortage of about 3 million homes, Mr. Boud said.
The markets Mr. Boud said are likeliest to experience trouble
soon are those in which prices are too high but there aren't
significant supply shortages. Dallas, for example, is 10%
overvalued but just 2.5% undersupplied.
"[Dallas] is going to hit the skids sooner than most markets,"
Mr. Boud said. "Right now jobs are still strong but prices are
outpacing even the job market."
There are other signs overexuberance. The number of licensed
Realtors has jumped by nearly 25% since 2012, hitting a nine-year
high in 2016 and sitting just 9% below the peak in 2006, according
to real-estate consultant John Burns.
In Denver, homes are selling briskly. The median number of days
homes spent on the market declined to eight in the first three
months of the year from 61 in 2012, according to real-estate
company Redfin. Home prices rose 8.5% in Denver over the year ended
in February, Case-Shiller said Tuesday.
Nicki Thompson, an agent in Denver, said she recently had a
listing that was on the market for two weekends at $1.2 million and
she received multiple all-cash offers above the listing price.
"It's just crazy," she said.
Martin Mata, a Redfin agent in Denver, said his buyers often
will commit to kicking in extra cash if the bank's appraisal comes
in lower than the purchase price. "We've got to be coming close to
a plateau for prices," he said.
Write to Laura Kusisto at laura.kusisto@wsj.com
(END) Dow Jones Newswires
April 25, 2017 10:07 ET (14:07 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.