Why housing prices aren't rising too fast
Renewed demand amid constrained supply is driving the market, but low interest rates give potential homeowners more buying power.
Are housing prices rising too fast?
Not really. While Americans were told throughout the housing crisis that a glut of homes on the market would keep things cheap for a long time, the number of existing homes available now has shrunk to a 4.7-month supply and new homes to a 4.4-month supply. The ideal balance between supply and demand is a six-month stockpile, so the market is now looking at a slight housing shortage.
As Nick Timaros at The Wall Street Journal suggests, that shortage comes at the same time mortgage rates are hovering near a record low of 3.5%. Even with tightened credit restrictions, this gives buyers nearly a third more purchasing power than they had just five years ago, when rates were closer to 6%.
That's great for investors, who make up 22% of the homebuying market and are converting homes into rentals at a quickening pace.
A supply of homes that's near a 20-year low isn't exactly great for the housing market in general, though. While it's squeezing prices higher, it's also indicating that folks who'd generally sell their homes around this time may still be carrying mortgages more than their homes are worth. And even if banks are helping them out with short sales, homeowners may be worried that they won't get enough for a down payment on a new house.
No matter if they have enough cash -- the house of their dreams may not be on the market long enough for them to comfortably make a move. Homes that took nearly 100 days to sell a year ago are now selling in less than 75 days.
Building a new home is still somewhat of a pipe dream, too, because new houses are only 8% of the overall market despite permits for new construction reaching a five-year high, according to the National Association of Realtors.
So when will pricing get too much for buyers to bear? Probably when this pace continues under normal conditions. Mortgage rates are typically between 6% and 8%, while housing prices were 10% higher even before the bubble's unsustainable highs. When housing prices start rising at that frenetic bubble pace again, maybe then it will be time to panic.
In the meantime, getting Americans back into homes they can realistically afford is a much higher priority.
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