How to Ensure Healthy Price Gains

Prices are increasing quickly, though that may not always be the most healthy development for the economy. Also, banks may soon loosen overly strict requirements, but a choke point remains in new-home construction.

May 8, 2013

The housing recovery is surpassing most expectations. Rising demand and many years of sluggish new-home construction have forced home prices to rise at a near double-digit pace in many parts of the country. The latest surveys from the National Association of REALTORS®, which looked at foot traffic at open houses and inquiries from potential sellers to real estate agents, continued to point toward too many buyers chasing too few sellers. Home prices should continue to rise this year and likely next year as well.

Fast-rising home values are clearly good for home owners, but price increases that are far in excess of income growth are not good for buyers and not a healthy development for the economy. However, it’s important to keep in mind that demand is moving ahead in spite of the stringent lending standards still in place. Fully one-third of buyers are using cash.

Consider what demand would look like if underwriting restrictions were dialed back to a more reasonable level. That’s finally a possibility for two reasons: Banks are sitting on piles of cash, and the quality of recently underwritten mortgages has been high. These conditions could persuade banks to start easing overly strict requirements. The additional demand in a more “normal” lending environment potentially would mean even faster price growth. The only way to tame excessive price jumps is for more inventory to reach the market. Investors could help here by selling properties ahead of their intended schedule to take advantage of rising prices.

The choke point today is from the slow recovery in new-home construction. Housing starts in March finally crossed the 1 million mark for the first time in five years. But 1.5 million new housing units are needed annually to keep home-price gains at a healthy, long-term level of around 3 percent to 5 percent a year. That balance seems unlikely this year as we will continue to see demand outstrip supply, fueling exorbitant price increases in some places.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.

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