Home prices climbed again in January, providing further evidence that momentum in the housing market continues to build.
Prices rose more than 8 percent year over year in January according to the closely followed Standard & Poor's/Case-Shiller Home Price Index, which tracks property values in some of the nation's largest metropolitan areas. All cities included in the index posted gains in January with Phoenix--where prices are up 23 percent compared to January last year--leading the way.
Since hitting bottom in March 2012, the 20-city index has clawed its way back up to 2003 levels, with January's gains representing the highest increase since the housing crash, the S&P report noted. Coupled with strong data in other sectors of the housing industry, continued strength in property values suggests the potential for further improvement looks promising.
"Economic data continues to support the housing recovery," David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, said in a statement. "Single-family home building permits and housing starts posted double-digit year-over-year increases in February 2013. Steady employment and low borrowing rates pushed inventories down to their lowest post-recession levels."
But while a strengthening labor market plus low mortgage rates might be juicing housing demand, rising home prices thanks to tight inventory continues to put would-be buyers in a bind. Realtors across the country are reporting bidding wars according to online real estate agency Redfin, which continues to put upward pressure on home prices. In January 2012, 66 percent of the offers Redfin agents wrote went up against multiple offers. This January, 69 percent faced bidding wars.
"It's easy to pinpoint why home prices are rising so rapidly," Redfin's Chief of Real Estate Operations, Scott Nagel wrote in an email. "Homeowners are hesitant to sell, and homebuyers are desperate to buy before home prices and interest rates rise too much more."
"The market keeps getting tougher for buyers, as 75% of offers written so far this month have faced competition," Nagel added.
Still, there is a light at the end of the tunnel. According to experts, rising home prices will encourage more sellers who were holding onto their properties to finally put them on the market, easing the inventory shortages that have driven such sharp home price increases. A flurry of new construction will also add more for-sale inventory, helping the market to normalize.
"Recent large, annual gains will bring more opportunistic sellers into the market, and new construction will also help to moderate the current imbalance in housing supply and demand currently helping to inflate home value appreciation rates," Stan Humphries, chief economist at online real estate marketplace Zillow, wrote in an email.
But sustained low mortgage rates have been a key factor in the housing recovery when it comes to affordability, Humphries said, adding that when borrowing costs rise again, home prices could be again out of reach for many.
"Once the Fed stops pushing borrowing costs down, we don't want to wake up and realize home prices have again climbed too high relative to incomes or rents," Humphries said. "We've seen that show before, and we know how it ends."
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