Does the Recent Rise in Home Prices Matter Much?

by 02 Aug 2012

(TheNicheReport) -- The average price of homes in the largest twenty American cities posted gains in May, the second consecutive month according to the respected Standard & Poor's Case-Shiller Home Price Index. Economists and real estate analysts closely follow the Case-Shiller Index as a barometer of the overall housing market, but even these two price increases are not sufficient to declare a full recovery. Compared to the median home prices from a year ago, the housing market has not yet returned to stability and could still see some losses in the months to come.

The first major drop in housing prices of the 21st century was recorded two years before the overall financial collapse of 2008. Even after the initial collapse in 2006, real estate agents have seen peeks of sunshine against the mostly gray skies of the housing market in the form of price upticks. The housing market tends to be seasonal and very sensitive to economic conditions and changes in policy; the last two major increases were seen in 2009, thanks to the first-time home buyers' tax credit, and in 2011 -thanks to banks warming up to short sales and distressed asset transactions.

Median home prices can only be sustained when real estate markets operate based on normal periods of supply and demand. Virtually all twenty metropolitan housing markets tracked by the S&P Case-Shiller Home Price Index are experiencing a frenzy of rental activity. This means that real estate investors cannot get to the closing table fast enough in order to acquire and fix properties to rental conditions. The demand for distressed properties, which happen to be the cheapest in the market, has outpaced supply.

The housing price gains of the last couple of months may continue as long as investors can find a steady supply of distressed properties to choose from. This means that more foreclosures will be needed to sustain price increases, which can be considered artificial at best. There are still many homes pending foreclosure proceedings across the United States, but at least five major lenders are working on mortgage principal reductions that will hopefully let homeowners stay in their homes.

Home prices may take a dip if too many foreclosures become available at once, or if too many principal reductions are successfully approved and real estate investors become disheartened with a sudden lack of dirt-cheap opportunities. The housing market will never fully recover unless average home shoppers are once again interested and able to purchase residential properties.


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