Housing Prices are on a Tear, Thanks to the Fed

Here's a good article from the Wall Street Journal yesterday that we can use with our buyers, sellers and our sphere. It offers a broad perspective of our current real estate market. Essentially, with prices up at least 10% from a year ago, many sellers should consider taking advantage of the bump and for buyers who don't want to get priced out of the market by either escalating prices or a raise in interest rates, now is a good time to lock in a low 30 year mortgage!!!!!

WALL STREET JOURNAL April 8, 2013

The U.S. housing market has broken out of a deep slump, and prices are shooting up faster than anyone thought possible a year ago. For many homeowners, that is a cause for celebration.

Nick Timiraos explains how the Federal Reserve keeping interest rates low is causing home prices to grow faster than they normally would during a recovery, and that has some experts worried. Photo: Getty Images.

But the speed at which prices are rising is prompting murmurs of concern that the Federal Reserve's campaign to reduce interest rates could be giving the housing market a sugar high.

Prices of existing homes rose 10% in February nationally from a year ago. They have been rising during the seasonally slow winter months—and they show signs of jumping further as the spring buying season gets under way. What's going on?

Prices of existing homes rose 10% in February nationally from a year ago. Above, a home in Mariemont, Ohio.

First, inventories of homes available to buy have fallen to 20-year lows. Home builders have added little in the way of new construction since 2008. Banks are selling fewer foreclosures. Investors have scooped up more homes, converting them to rentals.

Many borrowers, meanwhile, aren't willing or able to sell at prices that are down sharply from their 2006 highs, despite a greater inclination among banks to approve short sales. Tight lending standards mean some owners will hold back from selling because they aren't sure they would qualify for a mortgage on their next home.

Demand has also revved up, first from investors buying homes below their replacement costs, and later as rising rents and falling interest rates encouraged more first-time buyers to purchase homes that have monthly payments that are less than what it costs to rent.
Improving home-price expectations have also unleashed pent up demand. The U.S. added around 1.3 million households a year for the 10-year period ending in 2007, after which household formation fell to more than half that level. Household formation was lower in the five years following the housing bust than any period since the 1960s, according to Altos Research, an analytics firm in Mountain View, Calif.
But the population never stopped growing. Households simply doubled up. Between 2008 and 2010, the country had around two million households that "couldn't wait to launch on their own," says Mike Simonsen, chief executive of Altos Research. Many of those new households have been renters, but more are opting to buy.

The upshot is that, in a reversal from just two years ago, demand is outstripping the available supply. Even though sales volumes could be constrained this year by low inventories, some economists say prices are set to soar. "A lot of folks are realizing, 'Wow, there is no second wave of foreclosures. Interest rates if anything could head up. Prices are rising. If I'm going to get in I better get in now,'" says Christopher Thornberg, a housing economist with Beacon Economics in Los Angeles.

The impact of low mortgage rates is profound. Before the Fed began buying mortgage-backed securities in late 2008, rates for 30-year fixed mortgages stood at around 6.1%, and a borrower who could qualify for a $1,000 monthly payment could get a $165,000 mortgage. Today, that same borrower, at a 3.5% rate, can borrow as much as $222,000. In other words, the Fed's low-rate campaign has increased purchasing power by a third.

So is this the beginning of another bubble? Not really. For now, home prices on a national basis are still below their long-run average relative to incomes. "The recovery is solid. There are pure fundamentals you can point to," says John Burns, chief executive of a real-estate consulting firm in Irvine, Calif.

But he says the housing market is turning up sharply, "hockey-sticking faster than it otherwise would," because of investors, low inventories and low mortgage rates. The worry is that if prices keep rising at their current pace, "we're going to have a real affordability problem" once rates move above 6%, says Mr. Burns.

Buyers face a dilemma: paying more for a home today, compared with a year ago, or paying even more tomorrow at a time when interest rates might also be higher.

"It's been a lot slower process than we had hoped it would be, and things were getting a lot more expensive," says David Fritsche, a retired architect who lost bids on six properties in the past six months before closing last week on a home in Rancho Santa Margarita, Calif. He and his wife, Darlene, want to be closer to their daughter's family but plan to hang onto their old home in Phoenix for a few years.

While prices may be rising on the back of the Fed's easy money, tighter credit standards are acting as a brake on the recovery. High unemployment, low savings, and high debt loads among those who would like to buy their first homes will also remain a drag.

The housing sector is finally healing. But the sector may be in for more volatility until there is more demand from—and credit for—people who want to buy homes that they plan to live in.

By Nick Timiraos - The Wall Street Journal