U.S. home prices climbed 5.7% in January according to Tuesday’s Case-Shiller 20-city home price index. This was more than double the rate of personal incomes during the same period.
While rising home prices are seen as a positive to the housing sector, there have been increased concerns that it may become a hindrance. On KB Homes’ (KBH) earnings conference call last week, CEO Jeff Mezger said that first-time home-buyer activity has declined dramatically as the price point for those first-time buyers has increased by over $100,000 in the last three years.
“For new entrants into the housing market there is a question of affordability,” Bank of America Merrill Lynch Deputy Head of US Economics Michelle Meyer told Yahoo Finance.
But she said this shouldn’t have a material impact on the housing recovery as favorable affordability metrics continue to support the housing recovery.
“The good news is that interest rates are so low, which means that even with home prices rising in excess of income,” Meyer noted. “Your monthly mortgage payments are still reasonable, and they’re reasonable also relative to a lot of rental alternatives.”
Meyer added that prices growing faster than income doesn’t present a major risk for an eventual correction. As she outlined in a recent note, it takes "twin booms" in home prices and credit lead to the most painful corrections.
“Although we are seeing a rise in home prices globally, it is not accompanied by a similar increase in credit,” she wrote. Meyer specified that home prices, which are overvalued by 14% on a national level, are up because of low interest rates not excessive leverage in the mortgage market. This is a critical distinction from the housing bubble when leverage was very high.
Meyer added that low gasoline prices are a plus as the savings are being spent on supporting housing expenses, which currently make up about 20% of consumer expenditures.
Historically, the housing sector is one of the first sectors to bounce back during an economic recovery. But it’s been a little late to the party during this cycle as it was the source of problems during the last recession.
“What makes this housing cycle very different than prior cycles is that it’s more of a laggard,” she said.
Meyer said she remains optimistic for housing, arguing that the macro economy is the most important driver.
“As long as you continue to have job growth, if we start to see more broad-based wage growth, that’s a really good indicator for housing.”