NAR: Home Price Increase Has Downsides as Inventory Dwindles

Limited inventory may be boosting home prices, but buyer choices are stifled in an increasing number of markets, the National Association of Realtors (NAR) reported Thursday.

The association’s latest quarterly report showed that the median existing single-family home price increased during Q2 in 110 out of 147 metropolitan statistical areas (MSAs) compared to the same period in 2011. Of the remaining 37 MSAs, 34 posted price declines, and three remained unchanged.

The national median existing single-family home price was $181,500 in Q2, up 7.3 percent from the same time in 2011. This is the strongest year-over-year increase since the first quarter of 2006.

The second quarter’s results illustrated a marked improvement over the first quarter, which showed year-over-year price gains in only 74 MSAs.
Lawrence Yun, chief economist for NAR, said the organization expects prices to continue to rise in the future.

“It’s most encouraging to see a growing number of metro areas with rising median prices, which is improving the equity position of existing homeowners,” Yun said. “Inventory has been trending down, and home builders are still under-producing in relation to growing demand.”

Yun pointed out that price increases can also be attributed partially to a decreasing share of sales in low price ranges, where inventory tightened.

Distressed homes accounted for 26 percent of Q2 sales, down from 33 percent in Q2 2011. Drastic discounts from distressed sales usually work to bring the median home price down.

Since the summer of 2007, inventories have been trending downward steadily. The end of the second quarter saw 2.39 existing homes available for sale, a 24.4 percent drop from the same time in 2011.

NAR president Moe Veissi said that mortgage rates and historically low prices have increased buying power dramatically. The inventory in the lower price ranges needs to keep up with demand, he said.

“What we need now is additional inventory in the lower price ranges, so we hope banks will be releasing moreforeclosure inventory into the market. With gains apparent in all of the price measures, banks also should have more confidence in expanding mortgage credit to home buyers using safe but sensible standards,” Veissi said.

The national median family income in the second quarter was $61,000. To purchase a home at the national median price, a buyer making a 5 percent down payment would only need an income of $39,000.

“Because the income required to buy to a typical home is very manageable by historical standards, any further decline in mortgage interest rates will have little effect. Changes in underwriting guidelines would have a far greater impact,” Yun said.

Existing-home sales varied from region to region, rising 1.3 percent in the Midwest and South but slipping 0.6 percent in the Northeast. In the West, tight inventory brought existing-home sales down 5.3 percent as the median home price jumped up 13.4 percent.

“Inventory is pretty tight in all price ranges in most of the West except for the upper end, which accounts for the sharp price gain,” Yun said.

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