Home Prices Set To Rise, Thanks To The Fed

home prices

Tyler Frank,
Paramount Mortgage
NMLS ID 942420

Home Prices Nationwide Shooting Up Faster Than Anyone Thought Possible Not Long Ago

The US housing market has broken out of a deep slump, and prices are shooting up faster than anyone thought possible a year ago.

Prices of existing homes rose 10% in February nationally from a year ago. What is causing this increase?

Several factors are at play. Inventories of homes available to buy have fallen to 20-year lows. Since 2008, home builders have reduced new construction production. Banks are selling fewer foreclosures. Investors have scooped up more homes and are converting them to rentals which reduces the available housing inventory.

The US population continues to grow producing two million households from 2008 to 2010. More of these newly formed households are opting to buy homes rather than rent, reversing a long-standing demographic trend, according toMike Simonsen, chief executive of Altos Research.

Many homeowners, meanwhile, aren’t willing or able to sell at prices on average up to 30% off their 2006 highs. Tight lending standards mean some owners will hold back from selling because they aren’t sure they would qualify for a mortgage on their next home.

The current dynamics of the market and the historic low interest rates present a profound opportunity for many buyers. Before the Fed began buying mortgage-backed securities in late 2008, rates for a 30-year fixed rate mortgage stood at around 6.1%, and a borrower who could qualify for a $1,000 monthly payment could get a $165,000 mortgage. Today, that same borrower, at a 3.5% rate, can borrow as much as $222,000.

“I worry that borrowers won’t realize, until it’s too late, that the market is changing and could move away from them,” offers mortgage banker, Glenn Boland, with Paramount Mortgage in St. Louis. These homebuyers still have time to act, says Boland, but delay could present them with a real affordability dilemma: paying more for a home today, compared with a year ago; or paying much more tomorrow when interest rates have climbed higher.

For now, home prices on a national basis are still below their long-run average relative to incomes. “The recovery is solid. There are pure fundamentals you can point to,” says John Burns, chief executive of a real-estate consulting firm in Irvine, Calif.

The upshot is that, in a reversal from just two years ago, demand is outstripping the available supply. Even though sales volumes could be constrained this year by low inventories, some economists say prices are set to soar.

About the author: Tyler is Paramount Mortgage Company’s general counsel as well as a licensed mortgage loan originator. Tyler is a 1999 graduate of the University of North Carolina at Chapel Hill where he was a member of the university’s Dean’s List. He received his J.D. from Washington University’s School of Law in 2002 and is a member of the Missouri Bar Association and the Illinois State Bar Association.

Tyler is “big brother” mentor and role model to a young man through the Big Brothers Big Sisters of Eastern Missouri. He is a member of the St. Louis Sports Commission’s Associates Board, the University of North Carolina at Chapel Hill’s Alumni Admissions Committee and Mary Institute and St. Louis Country Day’s Alumni Executive Committee. In 2012, Tyler successfully summited Mt. Kilimanjaro (19,341 ft.) in Tanzania, Africa, and ran his first full marathon.

Tyler can be reached by email at tfrank@paramountmortgage.com or by phone at 314.372.4313.

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