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IRVINE, CA— Owners who are reticent to sell, combined with strong Millennial demand and a shortage of new construction, are contributing to home prices climbing this year, First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com. In a recent report from the firm, Fleming said, “Rising real house prices are a nationwide phenomenon, as real house prices increased in all 50 states and in every market we track. Many markets even experienced double-digit real house price increases in March, compared with a year ago.” Fleming also indicated that the supply in most markets was insufficient for this spring's strong demand.
On the other hand, wages are growing, he added. “Wages continue to move higher, growing at an annual pace of 2.7% in March 2017, as the labor market continued to improve. Wage growth has helped to offset the impact that higher mortgage rates and increasing house prices are having on home affordability.”
We spoke with Fleming about the lack of inventory, homeowners' unwillingness to sell and how this is affecting climbing home prices.
GlobeSt.com: How much is homeowners' unwillingness to sell contributing to climbing home prices?
Fleming: While not the only cause for climbing prices—strong Millennial demand and a shortage of new construction is also contributing—it is certainly the key short-term contributor this spring.
GlobeSt.com: What might entice them to sell and alleviate the lack of inventory that's contributing to high prices?
Fleming: Economists refer to a “wealth effect” that incentivizes sales. That is, the more the price goes up and homeowners gain equity, the wealthier they feel, which encourages the act of selling. So, further price increases and the growth in equity may eventually overcome the fear of listing for lack of something to buy or the rate lock-in effect.
GlobeSt.com: How do interest rates come into play in this scenario, if at all?
Fleming: Rates contribute directly to the lock-in effect. The higher the current rate relative to the homeowner's existing rate, the larger the financial penalty for moving. Higher rates result in a stronger incentive not to move.
GlobeSt.com: What else should our readers know about the supply squeeze and your real house prices report?
Fleming: If one is considering buying, now may be a good time. The limited supply and strong demand conditions are going to be around for a while. Add rising mortgage rates to that, and it's likely that housing affordability will continue to decline.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
