Are Housing Prices Sustainable?

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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.