The 4 Problems with Rising Home Prices

by Peter Thomas Ricci

We know, rising home prices are a very good thing, but are there elements of housing that they actually harm?

We’ll start off with an affirmative statement – there are many good things that come about from rising home prices. Homeowners build returns on their investments; banks’ balance sheets swell; builders are encouraged to buy more land and construct more homes; underwater homeowners gain much-needed equity; and with consumer confidence growing, more sellers list their properties.

All those things are great, but 2013’s double-digit price increases have also created some very peculiar issues for housing. Here are four to keep in mind:

1. Pricing People Out – Double-digit price increases are great for home sellers, but for homebuyers of modest means, it means additional barriers to an already stingy housing market. Aggressive price increases and rising mortgage rates make for an increasingly inaccessible market, and some analysts fear that with how quickly prices and rates rose, housing’s recovery could dampen a bit in the coming months.

2. A Non-Traditional View on Affordability – Housing may still be affordable on a relative scale (payment-to-income currently comes out to 20 percent, which is less than the 24 percent of 1990), but as the always excellent Nick Timiraos pointed out in the Wall Street Journal, such affordability equations assume two things: that the homebuyer not only have stellar credit, but the necessary finances for a large downpayment. And given that the housing recovery has depended on investors and all-cash financing, that’s not a good environment for modest homebuyers with lower incomes and smaller downpayments.

3. Lagging New Construction – Even if inventory is tight and competition with investors fierce, first-time homebuyers can still rely on new construction, right? After all, homebuilders typically respond to price increases with greater investment in new homes.

Except…this homebuilding environment is hardly typical, and with the vacancy rate remaining stubbornly high, homebuilders have geared their product more to affluent buyers. As we covered before, sales in the upper price brackets have been far more robust; in fact, last year, sales of new homes priced $500,000 and up grew by 36 percent, while sales of home prices less than $150,000 fell by 28 percent.

4. A Much-Needed Shift in Policy? – Probably the saddest part of the rising-home-price quagmire is that well-intentioned housing policy created it. After all, it was Federal Reserve policy that pushed interest rates to record lows in hopes of spurring home sales and reversing the post-boom price death spiral; now that housing is on firmer footing, though, and consumers are feeling the squeeze, could we see a shift in policy? Time will tell.

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