The Artificial Rise of Home Prices in the U.S.

by 05 Sep 2012

(TheNicheReport) -- In terms of an overall economic recovery, the pace of home prices in the United States is watched just as closely as real estate sales activity. Median home prices are up 3.8 percent since July of 2011, and in some metro regions like Phoenix and Miami the increase has been more pronounced. Prices have been steadily climbing over the last five months, and the last time an annual increase of this magnitude was experienced by American homeowners was in 2006.

This increase in home prices is certainly welcome, but there are a few reasons to believe that the uptick has not developed organically and thus the recovery may be labeled as artificial to an extent. Under normal market conditions, the home price increases should have been higher when taking into account the unusual stimulus and investor activity. 

A Playground for Investors 

While the housing market in the U.S. has not actually seen a period of normalcy for most of the 21st century, the current situation with regard to participants is unique. The sheer number of real estate investors in comparison to average homeowners is skewing housing reports. The first consideration is the inventory and its record number of distressed properties.

Average homeowners and real estate investors have had equal access to Real Estate Owned (REO) portfolios and short sales over the last few years, but the housing market has been a playground for investors thanks to the rock-bottom prices provided by foreclosures and other distressed properties. Investors have been busy making bulk purchases and taking advantage of record low mortgage interest rates, which has resulted in inventory reductions and price increases. 

The market conditions over the last 12 months have served as incentives for investors, and they have taken advantage of them. Those incentives, however, are now whittling away. This may put a stop to home price increases, something that was last seen when homeowners were given an incentive in 2009.

The Aftermath of Homeowners' Incentives

In 2009, the Obama administration rolled out a significant incentive for home shoppers and house hunters: the First-Time Homebuyer Tax Credit. Some critics say that this incentive was not enough, but by the summer of 2010 home sales and prices had gotten a healthy boost -enough for some public officials and analysts to start talking about the proverbial green shoots of the economy.

Home prices tumbled in 2011, virtually after all purchase contracts motivated by the groundbreaking tax credit had closed. After a few month of vertiginous drops, the Federal Reserve intervened with Operation Twist -an effort to keep mortgage interest rates as low as possible through the end of 2012. This incentive has also played a part in the recent run-up of home prices, which is leading some analysts to believe that an increase in mortgage interest rates after 2012 could hamper the recovery.


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