Great news! Existing home values are soaring back! Many markets have shifted to a strong seller’s market. According to Forbes.com, “Bidding wars have erupted in the most desirable neighborhoods and some buyers have started adopting pre-2007 tricks to win those face-offs including worrisome non-contingent offers at full asking price or higher. May showed a 15% increase in existing home values over May of last year. That’s the strongest increase in six consecutive months of double-digit increases, following 15 consecutive months of steady year-over-year increases. But is it Too Much?
This impressive increase is attributed to the return of home buyers to a market with limited inventory. It can easily be argued that new home construction was very nearly wiped out in the aftermath of the housing crash. Many small builders were forced out of business, while the more recession-proof “big-name” builders cut back, bunkered down, and reduced output to a trickle in order to outlast the low. Throughout the early part of 2013, housing demand has been steadily rising eating away the once-massive market inventory, but new home construction has barely increased at all. Is it Too Little?
The last time we saw an increase this high from one year to the next was between 2005 and 2006. Do those dates ring an alarm bell? For many real estate insiders, the similarity between the current market shift and those ominous dates, the period that marked the last great surge of Bubble-building during the Housing Boom is somewhat nerve-wracking, but Don’t Panic.
“The boom period was marked by easy credit and overbuilding, but today we have tight mortgage credit and widespread shortages of homes for sale,” says Gary Thomas, President of the National Association of Realtors, “The issue now is pent-up demand and strong growth in the number of households, with buyer traffic 29 percent above a year ago, coinciding with several years of inadequate housing construction. These conditions are contributing to sustainable price growth.”
Real Estate economists may warn that this type of price growth is “too fast,” but ultimately it can’t last. Distressed home sales, with their discounted pricing, heald steady in May from April’s low 18% marketshare, as the depth of those discounts continued to lessen because of increased investor activity and demand, prompting banks to continue moving their inventory to the market. The ‘hold-out’ homes are likely to enter the market soon as the higher sales prices coax the potential sellers out. New home building is increasing. Home starts rose almost 29% in May and as those homes enter the market the supply will even out the demand ratio.
“Inventory will likely remain below year-ago levels for a while yet, as builders ramp up capacity and sellers wait to squeeze every last drop of equity from their homes before listing,. But a corner has been turned,” said Stan Humphries of Zillow, Forbes.com reports. As new inventory eases the demand, mortgage rates are starting to creep back up. While they aren’t expected to slow the housing market much, they will serve as an additional factor in cooling the buyers’ fervor and help stabilize the unsustainable price growth. Before too long, home values will slow back down to historically normal levels between 3% and 5%.
The housing market is still transitioning, but there in no need to worry. Instead, in the words of Stan Humphries, “Enjoy it while it lasts.”
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About Tom Davidson — Tom Davidson is Vice President of Express Schools, LLC. which operates online education providers Real Estate Express, Insurance License Express and License Tutor. Follow him on Twitter.