Homebuyer Maria Casillas drags her two kids from one prospective home to another, surprised to learn that most everything desirable in her price range is quickly gone. Working-class neighborhoods here are seeing bidding wars between buyers.
She’s part of a broader national trend. Even while home sales are sluggish, home prices are rising in much of the nation. Competition is heating up.
“It’s like everyone is coming out to get a house,” lamented Casillas, 33, as her fiance, David Herrera, inspected the closets of homes they both feel are too small.
Pre-approved by a lender for up to $200,000, Casillas is finding that there’s nothing of good size available in that range here. Price wars are common in high-growth, high-wealth cities such as booming San Francisco. But this is blue-collar Chicago, an exclamation point for the national trend of higher home prices.
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“It’s getting pricier,” said Robert Shiller, the Yale University economist who created the Case/Shiller Home Price Index and changed the way home prices are tracked.
While nowhere near the boom that preceded the bust in 2008, the price increases seem incongruent, Shiller suggested.
“We do see nationwide an increase in home prices and I don’t know if things are better. This boom has negative color to it,” said Shiller, expressing concern that bid wars often reflect a lack of available housing in the most-desirable neighborhoods.
The price trend is making housing less affordable for many Americans, who saw wages grow by just 2.6 percent since April 2014. The midpoint price for a home in the United States rose by almost 8 percent between March 2014 and March 2015. In Chicago, where Casillas is house shopping, the midpoint sales price rose by 8.8 percent in the first three months of 2015, according to the National Association of Realtors.
Historically, home prices nationwide have averaged 3-4 percent growth annually with little risk for owners. In the mid-1990s, home prices began soaring to above 13 percent annual growth, before collapsing in 2008. It’s an open question as to whether housing reverts to historical growth rates.
“I think it’s overwhelmingly likely that’s what’s going to happen,” said Austan Goolsbee, a University of Chicago economist and former top adviser to President Barack Obama.
Addressing the Society of American Business Editors and Writers in April, Goolsbee expected more home rental, lower ownership rates and continued tight lending standards.
If that’s true, the sharp spikes in home prices in some parts of the nation could mean trouble.
Early warning system
Real-estate valuation firm Smithfield & Wainwright warns that at least 14 states and the District of Columbia may be experiencing inflated prices like those that preceded the U.S. financial crisis.
“You’re starting to get a disconnect,” David Macpherson, the company’s chief economist, said of rapidly rising prices in some markets.
His company compares home sales price data from the Federal Housing Finance Agency to the cost of renting a home or replacing one in areas across the country. When the sales price exceeds by 10 percent or more either the cost of renting or replacing a home, the valuation firm argues, it signals a potential price bubble that could burst.
“The banks are exposed and the homeowners are exposed because they both have a false feeling that the house is worth that amount of money. And that’s false equity,” warned Hogan E. Copeland II, Smithfield & Wainwright’s chairman. The equity they think they’ve built up in their home may prove ephemeral.
During the first quarter of 2007, before the national home-price bubble burst, sales prices nationally were 39.7 percent higher than the cost of renting. In the first three months of 2015, sales prices were about 8 percent above the cost of renting, under Smithfield & Wainwright’s 10 percent “danger zone” but approaching it.
The states with prices 10 percent or more above the cost of renting or replacing a home are Alaska, Arizona, Colorado, Idaho, Louisiana, Massachusetts, Minnesota, Montana, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming, along with the District of Columbia.
The data should be viewed as an “early-warning system,” said Copeland, since it implies that lenders and government-controlled mortgage titans Fannie Mae and Freddie Mac might be exposed to losses if homes are selling for more than they are really worth and prices correct.
Two housing markets
A McClatchy analysis of sales data provided by the National Association of Realtors shows also that wealthier Americans, who presumably have more access to credit or the ability to pay cash, are reaping most of the gains from rising prices and increasing home sales.
From 2010 to 2015, sales of homes valued above $1 million rose by 21.06 percent, and homes valued between $500,000 and $750,000 rose 14 percent over the same period, McClatchy found.
At the bottom of the price ladder, sales of homes valued between $100,000 to $250,000 – middle-class homes – rose by just 4.5 percent over the six-year period. Sales of homes valued at under $100,000 actually fell by 3.38 percent from March 2010 through March 2015.
“This is a bifurcated housing market,” said Kevin Logan, chief economist for HSBC Securities (USA) Inc., an arm of the giant global bank HSBC. “You’re getting two housing markets in a sense.”
Housing data of late are mixed. Sales of existing homes nationwide in March were 10.4 percent above a year ago and 6.1 percent over the prior month. But sales of newly built single-family homes tumbled 11.4 percent in March.
Meanwhile, new home starts, while 2 percent above February, were still 2.5 percent lower than March 2014. And construction spending slipped 0.6 percent in March, according to the Commerce Department.
There are some bright spots.
“What’s changed is there are fewer investors in the market, and more people who are buying and selling homes because they want to live in them,” said Patrick Newport, an economist specializing in housing for forecaster IHS Global Insight.
Also California, the nation’s most populous state, is bumping up the national numbers.
“February was stronger than January and our March numbers actually exceeded our expectations,” Leslie Appleton-Young, chief economist of the California Association of Realtors, told McClatchy. “We had the largest month-over-month increase that we’ve seen since 2008. We feel that the market is kicking in gear.”