The trouble with rising home prices

|By:, SA News Editor

"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