The trouble with rising home prices

"It's going to be a slower recovery than people had hoped because a number of people have been priced out of the market." says John Burns, head of a home-building consulting firm. Rising home prices are nice for confidence and for the repair they can do to both consumer and lender balance sheets, but - especially coupled with higher mortgage rates - they've put a big ding in affordability.

Based on traditional metrics in which the current mortgage payment-to-income ratio stands at 20% vs. a 20+ year average of 24%, things still appear reasonable, but the ratio isn't nearly as favorable for first-time buyers, nor those with lower incomes, smaller down payments, or imperfect credit. This pinch is important because thus far, much of the housing recovery has depended on investors and cash buyers.

Builders - no doubt also remembering 2008 - have responded by being slow to ramp up entry-level production, instead focusing on the higher-end market where business remains brisk. The worry, says Thomas Lawler, is construction remains low and prices continue a steep rise, forcing even more out of the market or banks to bypass standard mortgage-qualification rules.

Earlier: A number of downgrades hit homebuilding sector.

Related ETFs: XHB, ITB

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Comments (1)
  • King Rat
    , contributor
    Comments (1902) | Send Message
    Because everybody needs to live "somewhere" and many live in "homes", rising "home" prices means less money to spend on other parts of the economy.


    Sure "investors" in homes make a profit but it comes at the expense of the buyer.


    This is different than stocks because stocks generally rise when the value of the company rises. If I buy a $30 stock paying a 20¢ dividend and sell it at $45 when it pays a 30¢ dividend, the buyer is paying 50% more, but getting a 50% higher dividend.


    When a California home that sold for $300,000 4 years ago now sells for $450,000, the buyer is still only getting the same house. Incomes to pay for tax, mortgage, and insurance have not risen by 50% during that time, and if the seller also needs to buy a new house to live in, there is zero net gain for the seller despite a net loss for the buyer. So who possibly wins when housing prices rise other than insurance companies, banks, and tax collectors?
    10 Mar 2014, 04:07 PM Reply Like
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