The housing market has begun to recover in the first half of 2012. Unfortunately, the housing market might soon plateau if the rest of the economy doesn't catch up.
Home prices rose higher from March-May than they have in a quarter century, but economists from the real estate and mortgage data aggregator CoreLogic believe that a sluggish economy might stunt further growth in the housing market.
Overall, home prices rose 5.6% during the three-month period, after the market reached a low in February. In May alone, home prices increased by 2% over prices in May 2011, making it the third straight month that home prices posted year-over-year gains over the previous year. Of the 100 biggest metro areas in the U.S., 71 areas experienced price increases. This is the largest increase since November 2006, before the housing bubble popped.
Most people have since grown wise when judging price fluctuations in the housing market. For years, people watched as home prices climbed steadily, only to see the market suddenly crash. Now, with home prices seemingly on their way back, the economy is lagging behind. This leaves people with a very important question:
Will home prices continue to rise even if the overall economy does not?
"The short answer is no, because prices are highly correlated to median incomes, which have not increased on an inflation-adjusted basis since 1996," said Sam Khater, senior economist for CoreLogic.
The reason for this pessimism is that home prices seem to be getting a boost in some markets artificially due to a high amount of borrowers owing more on their mortgages than what their houses are worth. This is keeping a lot of potential home sellers off the market, and this reduces inventory and led to tighter market conditions on lower-priced properties in some of the markets that were hit hardest in the recession.
"For example, Phoenix (up 14.7%) and Miami (up 9.7%) are the two fastest-appreciating very large markets, including distressed sales," Khater said. "But, even when excluding distressed sales, prices still increased 10% and 7%, respectively."
The good news for the economy is that this recent price increase has taken many borrowers out of negative equity. Most of the people affected by this are people with smaller homes and mortgages.
"National home prices below 75% of the median increased 5.7% from a year ago, compared to only a 1.8% increase for prices 125% or more of the median," Khater said. "While the influence of home prices generally accrues to all properties, the much larger rise in prices for lower-priced homes helped improve the negative equity share more than it would have otherwise done, because negative equity has been highly concentrated among lower-priced homes."
The 29 markets that experienced price declines, like Atlanta and Chicago, still have a high number of distressed home properties. Atlanta and Chicago each saw home prices decline by about 4% during this three-month period of prosperity in other markets. They are not yet on the comeback trail.
Luckily, those markets were in the minority this time around. Overall, this should be received as positive news for the time being. The next quarter's reports will let us know if the comeback trail is, in fact, alive and well.
Hedy Goldman has lots of knowledgeable information to share. She has been practicing real estate since 1996 and is a 2010 gold award winner at Windermere Real Estate SoCal. Hedy sells all over San Diego, but specializes in North County Coastal. She can be reached at (858) 504-2334 or San Diego Realtor.