NEW YORK CITY—“As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?” says David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. Commenting on the latest S&P CoreLogic Case-Shiller Indices, issued Tuesday, Blitzer observes, “Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up.” He cites the increase in real, or inflation-adjusted, home prices over the past three years as evidence that demand is rising.
At the same time, says Blitzer, “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” as of April. “Adding to price pressures, mortgage rates remain close to 4% and affordability is not a significant issue.”
The latest Case-Shiller 20-City Composite Index, reflecting April residential pricing, indicates a 5.7% year-over-year price increase, down from 5.9% in March. Economists polled by Reuters had expected a 5.9% Y-O-Y rise for April.
Seattle, Portland, and Dallas reported the highest Y-O-Y gains among the 20 cities for April. Seattle led the way with 12.9%, followed by Portland with 9.3% and Dallas with an 8.4% increase. Seven cities in the 20-City composite reported greater price increases in the year ending April 30 versus the year ending March 31.
“The question is not if home prices can climb without any limit; they can't,” says Blitzer. “Rather, will home price gains gently slow or will they crash and take the economy down with them?”
For the moment, at least, conditions appear favorable for avoiding a crash, he says. “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. Total mortgage debt outstanding is $14.4 trillion, about $400 billion below the record set in 2008. Any increase in mortgage interest rates would dampen demand. Household finances should be able to weather a fairly large price drop.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
