Only a few years ago, the go-go housing market went down in flames. Foreclosures shot up, construction grinded to a halt, and prices fell. Now, in some of America’s largest cities, housing prices are back with a vengeance. According to the S&P/Case-Shiller Index out earlier this week, home prices last November jumped 23 percent in Phoenix compared to last year. San Francisco saw a 13 percent bump. To get a sense of what’s driving sales, let’s consider the Los Angeles market. With interest rates near rock bottom, consumers are scrambling to lock down a deal.
Michele Saywell is shopping for her first house.
“The prices have started to increase again. And I’m hoping to finalize and close a transaction before that whole bubble escalates again,” says Saywell. “My absolute top price is about $260,000.”
She plans to put down 20 percent in cash. The rest will come from a conventional mortgage. Unfortunately for her, many other consumers have also decided that now is the time to buy. To get a sense of prices and demand, I tour some houses on a Tuesday, which is open house day for realtors in Los Angeles.
I visit one house in the Miracle Mile neighborhood with a fountain in the front and a pond in the back. In many other U.S. cities, this house would be considered upper middle-class. Barbara Palmer is the realtor showing the property.
“It’s a redone craftsman, two-story. Three bedrooms, two baths. With a fabulous backyard with a fishpond. A guest space in the back – all redone. And it’s listed for $1,099,000.”
Not exactly cheap. But that hasn’t dampened interest.
“There are at least two, and more offers coming in. And it was first shown three days ago,” says Palmer.
Just like in the boom years, she’s seeing people bid-up properties.
“I sold a home in the valley that was $310,000 asking, and it went for $385,000 in December with 21 offers in four days,” says Palmer.
When I follow up with her a few days later, Palmer says the owners of the Miracle Mile property got five offers in one week. The house is now in escrow, sold for more than its asking price.
In the Westwood neighborhood, it’s the same story. Realtor Chad Lund describes the property he’s showing as “a Spanish-style 1932 home. Three bedrooms, two-and-a-half baths. Just shy of 16,000 square feet. We’re currently at $899,000. We’ve got five offers on it.”
In the backyard, I ask mortgage banker Sean McMillan for his impression of the L.A. market.
“There’s such little inventory out there that everything is getting bid up, and maybe perhaps over-priced and almost, almost unjustifiably just because the competition is so great to get and access the property,” says McMillan.
Does that mean the bubble is back?
“You know, it’s really interesting because there are some properties that are hitting almost those same values as 2005. Which is a spike,” says McMillan.
He’s seeing a lot of cash, particularly from Chinese buyers.
“I had one client [from China], when she started, her price point was $1,500,000. And then, after about three months of searching, she said, ‘OK. I’m at $2,500,000. I just infused myself with another million dollars in cash.’ And she’s an all-cash buyer. No financing needed,” says McMillan.
Recovery hits home prices The latest home price numbers from the S&P/Case-Shiller Index show the strongest year-over-year growth since 2006.
Los Angeles is an anomaly. But it’s not the only one.
Susan Wachter is a professor of real estate and finance at the Wharton School. She’s seeing foreign money pushing up prices in Miami too.
“There are condos there that are going fast for folks in Latin America who want to have a safe place to put their money,” says Wachter.
Real estate is booming again in San Francisco, Boston, Washington and Las Vegas.
“Those markets that were hardest hit by the crisis are seeing prices come back. And prices are accelerating in those markets,” says Wachter.
But in most cities, demand is less intense.
“Housing prices are still off their highs. And they will be for quite some time. We’re not going to rocket back in the country as a whole, by any means. It’s going to take time,” says Wachter.
Sales in many parts of the Midwest have been flat. But that’s no comfort for consumers like Michele Saywell in Los Angeles.
“I never imagined that it would be this difficult,” says Saywell.
To escape the competition, she started shopping in less desirable neighborhoods.
“You’re looking at these places going, they need new floors, they need electrical work done. They may need new plumbing. And you’re still losing out,” says Saywell.
She made an offer on a fixer-upper, but was beaten out by someone with cash.
“That seems to be sort of my dilemma. A lot of buyers out here are actually paying cash. Can you believe it? They’ve got $250,000 in their back pocket,” says Saywell.
Still, she has faith. “I predict, by the end of the year, I will be a homeowner,” says Saywell.
If you’re thinking about entering the market, but aren’t ready yet, don’t panic. Part of the reason for the spike in prices has to do with the lack of new construction. As builders start cranking out new houses to meet demand, experts say that additional inventory should help stabilize prices.