Home prices soar in some US cities

Builders in the US are now starting new homes at a modest clip despite significant demand, probably because the cost of construction outweighs the prices of homes.
Builders in the US are now starting new homes at a modest clip despite significant demand, probably because the cost of construction outweighs the prices of homes. PHOTO: REUTERS

WASHINGTON • US home prices have hit record highs in some major metropolitan areas, and house-flippers are behaving like it is 2005: It is no wonder people are chattering about another housing bubble.

But residential real estate is not in a speculative bubble, industry observers contend. Instead, a low inventory of available homes is pushing prices up. But prices will eventually fall as buyers give up or as more new homes come on line. The structural issues that led to the housing collapse last decade are not present.

"The havoc during the last cycle was the result of building too many homes and of speculation fuelled by loose credit," said Mr Jonathan Smoke, chief economist at Realtor.com. "That's the exact opposite of what we have today."

Last year, only six metro areas exceeded his benchmark - a housing boom and bust index of the mid-2000s - by 10 per cent, with San Jose coming in highest, at 19 per cent above 2001 levels. In 2005, there were 29 cities that were at least that bubbly.

The markets that look the most like a bubble are, unsurprisingly, places where population is growing faster than housing supply. They include California cities where zoning rules have slowed or prevented new building, as well as in Texas where rising land and labour costs, and some aftershocks from the bust, have held back housing starts.

Meanwhile, the share of households that rent is near 50-year highs, helping to drive up rental prices and giving investors incentive to snatch up for-sale homes.

Prices in Austin and the San Francisco Bay area, among other places, are likely unsustainable, Mr Smoke said. That could be bad for buyers who get in at the top of the market and bad for the local economy if high housing costs drive talented workers away.

Figuring out how to create enough new housing to meet demand is a tricky question. In one scenario sketched out by Mr Smoke, faster economic growth would lead to higher interest rates, leading banks to lend more easily to home buyers.

In another, a bad economy could slow household growth, dampening demand.

Builders are now starting new homes at a modest clip despite significant demand, probably because the cost of construction outweighs the prices of homes.

Today's housing market is not without some pockets of speculation, said RealtyTrac's senior vice-president Daren Blomquist. "They're riding the wave of rising home prices. They're not buying low - they're hoping that they can sell high." BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 20, 2016, with the headline 'Home prices soar in some US cities'. Print Edition | Subscribe