Home Prices Spike, But Is This the Real Deal?

Economists tell us that the reason the US is doing better than Europe is because of two things: our equity markets and our housing sector.  And now comes the news that housing is posting its best home prices since 2006.  The widely followed Case-Shiller indexes showed the home prices of single-family homes across 20 of the most important U.S. cities grew 9.3% in February, its fastest rate since May of 2006. Single family starts are expected to rise to 700,000 new homes (from 535,000 in 2012) and to 1 million in 2015.

All of this activity is, of course, being driven by all-cash investors looking for high returns (the Blackstone Group is reputedly spending $100 million a week buying homes). And homebuyers eager to lock in at record low interest rates who have very little to choose from. The reasons for short supply aren’t however related to the health of the market but because of the obverse. Home prices are still 29% to 30% off their mid-2006 peaks and monthly foreclosures are more than double what they were before the recession. Clearly, underwater homeowners and people who’ve seen some part of their equity vanish simply don’t want to take a loss so they’re waiting it out. As a result, we’re building more.

As housing price gains 23% per year in Phoenix; 17.6% in Las Vegas, and 16.5% in Atlanta, let us think carefully before we go on a building spree. We still have 1.1 million homes in some state of foreclosure and a shadow inventory that tops 2 million. It is important that we temper the current exuberance with a view to not flooding the market with excess inventory. The housing sector is critical to our recovery for two large reasons – the wealth effect which bolsters consumer spending and the fact that small to medium-sized businesses rely on home equity lines of credit to underwrite their businesses. True recovery can only happen with housing.