Archive for June 25th, 2013

Even Realtors say home prices are ‘unsustainable’

Tuesday, June 25th, 2013

For six straight months, home prices have been leaping in double digits from a year ago. In May, the median existing home sale price was 15.4 percent higher nationally than May of 2012, according to a new report from the National Association of Realtors.

The Realtors themselves say that kind of jump is “unsustainable.”

“Some of the increases can be explained by the fact that it is recovering from an over-corrected situation,” said Lawrence Yun, chief economist for the Realtors. “But with people’s income rising at only 1 or 2 percent and prices rising in double digits, it cannot continue.”

Part of the steep rise in the median home price can be attributed to a change in the mix of homes that are selling. Sales of homes priced below $100,000 were down 9 percent from a year ago, while sales of homes priced at more than $500,000 were up 33 percent.

Distressed properties, that is short sales and foreclosures, are also a diminishing share of total home sales. They are down to just 18 percent, the lowest since the Realtors began tracking these sales in 2008. That share, however, is far higher in some of the formerly hard-hit markets, where another new phenomenon is playing out.

“We noticed in some of the markets where we were either buying or selling properties, that the price discounts on REOs [bank-owned homes] appeared to be vanishing rapidly,” said Rick Sharga of Carrington Mortgage Holdings, a fund that has invested in distressed properties.

In many of the markets that took a beating during the real estate meltdown, such as California, Arizona and Florida, prices of distressed homes are rising faster than traditional home prices. These markets are also seeing the highest volume of home sales, therefore having an outsized effect on the national number.

“You can at least make an argument that part of the dramatic increase in median home prices can be attributed to the foreclosure discount evaporating. That suggests that overall home price increases may be slightly overstated,” said Sharga.

Also weighing on home prices are rising mortgage rates. May’s existing home sales report from the Realtors represents closed sales, so contracts and interest rates would have been signed and locked in March or April, before rates began to rise.

Based on the change in mortgage rates from early May to today, the average buyer would have to pay 13 percent more in monthly payments, including taxes and insurance, according to Mark Hanson, a California-based analyst. They also have to earn 10 percent more in income to qualify for a loan based on a typical qualifying debt-to-income ratio of 45 percent.

“These are huge moves especially considering—when purchasing a house using a mortgage—most people buy based on ‘monthly payment and the maximum allowable debt-to-income ratio.’ This means first-timer share will fall even further. They are already at a multiyear low even with record-low rates,” said Hanson.

First-time homebuyer participation was at just 29 percent, according to the Realtors, a five-year low. Without these buyers, as investors pull back and prices rise, home sales will likely lose steam. June’s report on pending home sales, or signed contracts in May, will tell just how much rising rates are impacting sales. That report will be released Thursday, June 27.

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