Can Rising Home Prices Actually Delay the Recovery?

December 3, 2012

The rapid increase in home prices in some markets may wind up hampering the housing recovery, CNBC columnist Diana Olick reports. 

“The reason is that the rise in prices is mainly due to investors, mostly large hedge funds, that have been swooping into the most distressed markets and inhaling properties as fast as their plentiful cash will allow,” Olick writes. 

Investors are snapping up properties and turning them into rentals, unlocking some big returns–up to 12 percent–on their investments too. But as home prices rise, they’re seeing their returns shrink.

“The worry with investment demand is that the very recovery in prices that it is driving will eventually reduce rental yields and undermine the investment case,” says Paul Diggle of Capital Economics.

Olick says that the housing recovery is dependent on investors, since they tend to make all-cash purchases. With heavy restrictions in the mortgage market still in place, many typical home buyers are being shut out of the market, unable to finance a home purchase. Also, many home owners are still underwater–owing more on their home than it is currently worth–so they are unable to move.

Source: “How Rising Home Prices May Stall the Housing Recovery,” (Dec. 1, 2012)