Do Rising Prices Indicate Another Crash?

DSNews. June 30th, 2017

For the fifth month in a row, home prices have set a national record, according to the S&P CoreLogic Case-Shiller National Home Price NSA Indexreleased today. Across all nine Census divisions, U.S. home prices rose 5.5 percent over the year.

The Index’s 10-city composite rose 4.9 percent for the year, while the 20-city composite increased 5.7 percent. Both numbers were down slightly from March’s numbers, which came in at annualized growth rates of 5.6 percent and 5.9 percent, respectively.

Still, despite the slight slowing of growth, home prices are steadily climbing—and have been for some time. And according to David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, the continuing rise in prices raises concerns of another housing crisis.

“As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?” Blitzer said. “Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up.”

Increasing demand—and inventories that just can’t keep up—are also of concern, Blitzer said.

“The increase in real, or inflation-adjusted, home prices in the last three years shows that demand is rising,” he said. “At the same time, the supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four-month supply. Adding to price pressures, mortgage rates remain close to 4 percent and affordability is not a significant issue.”

Ultimately though, Blitzer thinks we don’t need to worry about another crash—at least not yet.

“The question is not if home prices can climb without any limit; they can’t. Rather, will home price gains gently slow or will they crash and take the economy down with them?” Blitzer said. “For the moment, conditions appear favorable for avoiding a crash. Housing starts are trending higher, and rising prices may encourage some homeowners to sell. Moreover, mortgage default rates are low and household debt levels are manageable.”

Broken down by city, Seattle, Portland, and Dallas experienced the biggest jumps in home prices over the year, with 12.9 percent, 9.3 percent, and 8.4 percent increases, respectively.

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