House prices are up, but not yet bubbling
Sharp price increases in some regions raise concerns about a new housing bubble. But as prices rise, more sellers will appear, steadying the market.
Homeowners have reason to be a little optimistic these days. According to the latest Case-Shiller Index, property values are up 6.8 percent from December 2011. And some cities are seeing increases they haven't seen in decades. Detroit, for example, hasn't seen gains like this since 1991. But no one holds a candle to Phoenix. Prices there are up an astounding 23 percent. Not to spoil the good news, but here comes the question we have to ask: Are we headed for another bubble?
First of all, not every market in the U.S. is experiencing the boom. Each region has its own little ecosystem when it comes to housing. Prices in Texas and South Dakota, for example, are pretty flat compared to Phoenix and California, where prices are increasing at double digit rates.
"And that's largely driven by the fact the banks are no longer selling homes" says Glenn Kelman, the CEO of the real estate brokerage Redfin. Those homeowners don't want to list their houses at the banks' prices, so they don't put their houses on the market, either.
Bill O'Rafferty is a realtor in the Inland Empire in California, where normally there are 1,800 to 2,000 houses for sale at any given time. "This morning, there's 346," O'Rafferty says.
Yet another factor -- hedge funds are buying up single-family houses in bulk in the Inland Empire and other areas that were hardest hit by the downturn. Those cash investors make up about 40 percent of O'Rafferty's sales these days.
Throw in some super-low interest rates for an added boost to demand, and you have price increases O'Rafferty hasn't seen since '93.
Even though this is the very beginning of the housing recovery, DataQuick analyst Andrew LePage says, "It doesn't surprise me that I'm already hearing the 'bubble' word."
LePage says there are a couple of things to consider before we start dropping the b-word. One is that in many markets prices are still below peak levels of 2005 and 2006, and "in many cases, sales are still below average."
Secondly LePage suggests that if prices continue to increase, many of the people who are underwater will get pulled back onto dry land and they, along with others who have been waiting, will finally put that for sale sign in the front yard. Supply will increase, which would make the risk of a bubble low.