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In March, Radar Logic’s home price index, which tracks 25 metro areas,
showed a 13.1 percent year-over-year gain.
Even with the double-digit gain, the data and analytics firm touched on
several points to explain why the trend won’t last, with the main one being the
temporary issue of limited supply.
At the peak of the housing boom in July 2007, the number of single-family
homes available for sale (excluding condominiums and town homes) stood at 3.4
million compared to 1.9 million in April 2013, according to data from the National Association of Realtors.
Also, data from the Department of Numbers’ Housing Tracker revealed inventory for
residential properties fell 15.5 percent year-over-year as of May 27.
Month-over-month, the tracker showed inventory is up 3.9 percent, and Radar
Logic expects inventory to increase further as supply constraints have less of
an impact due to rising prices.
According to the report, three supply constraints that will ease with
rising prices: low and negative equity, seller psychology, and building
activity.
As several analysts have observed, rising prices are allowing low and
negative equity homeowners to list their properties, which adds to the overall
supply.
Seller psychology will also shift with price gains. According to the
report, some sellers are reluctant to list their home during a time when prices
appear to be rising, but when they do put their home up for sale, the new supply
of homes could inhibit price increases.
After analyzing data from the Census Bureau, Radar Logic also explained that while building
activity slowed starting in 2008, activity is picking up again, with permits in
April up 150 percent from the low in January 2011.
Demand is also not expected to last, according to the report, since it is
driven by low mortgage rates and institutional investors, a group that is also
contributing to the shortage of homes available for sale.
Once these “unorthodox” market forces fade, Radar Logic believes demand
will also cease.
The decrease in demand may also occur sooner than expected. While mortgage
rates remain low, last week, fixed rates rose to the highest level in a year.
“Fixed mortgage rates followed long-term government bond yields higher
following a growing market sentiment that the Federal Reserve may lessen its
accommodative policy stance,” explained Frank Nothaft, VP at Freddie Mac, in a
release.
As for demand from institutional investors, purchases from this group will
diminish once the buy-rent strategy is no longer as profitable due to the
increase in home values.
Institutional purchase activity has been especially notable in seven metros
areas—Atlanta, Los Angeles, Las Vegas, Miami, New York, Phoenix, and Tampa. In
these markets, the impact of their exit will be more strongly felt, according to
the report.
Recent evidence actually suggests profitability in the single-family rental
market is already disappearing.
Radar Logic found the composite price per square foot paid by institutional
investors in the 25 markets tracked increased 14.4 percent from a year ago,
while data from Trulia revealed asking rents have risen by just 2.4
percent.
