The housing market looks to have picked up some traction recently with new data report numbers released this past week showing growth in permits and home prices, which helps boosts the U.S. outlook. But Robert Shiller, Case Shiller Index co-founder and Yale University professor of economics, cautions this recent pickup might not be fundamentally sustainable and notes “we can’t trust the momentum in the housing market anymore.” Is the housing market in a solid recovery state or does it appear to be a bubble lacking fundamental support?
Permits for construction on future homes hit a new 5-1/2 year high in October. Building permits increased 6.2 percent to a seasonally adjusted annual rate of 1.03 million units, the highest rate since June 2008. Multi-family permits surged 15.3 percent while single-family home permits increased .8 percent after dropping 1.9 percent in September. The lack of supply has still not caught up with the strong demand of housing. This has contributed partially to the rise in home prices and should continue to aid in increasing numbers for construction, rent and prices.
The price of single-family homes recorded big gains in the month of September. The Case Shiller composite index reported solid increases in several regions across the U.S. The index jumped 13.3 percent in September from a year ago. This is the strongest gain recorded since February 2006. Home prices were up 0.7 percent in August from the prior month; the tenth monthly increase in a row. But this continued increase in home prices may not be maintainable. Investors, specifically institutional investors, have helped push home prices to new highs and these investors are starting to pull back on their acquisitions. These all-cash investors pushed home prices up more than 13 percent over the last 12 months which has priced out regular homebuyers.
Of all home sales in October, 6.8 percent were institutional investors according to RealtyTrac. This was a significant drop from the month before which boasted 12.1 percent of all sales. Anika Khan, senior economist at Wells Fargo Securities, told “Street Signs,” “In a lot of those hard-hit markets, we continue to see the greatest price increases. … A lot of this increase is exaggerated. However, the underlying fundamentals are still very positive, especially in those markets that have strong household formations, strong population growth and strong job prospects. … We are seeing a recovery in the housing market.” As investors exit their investments and slow their acquisitions, home prices will drop back to levels centered on supply and demand of non-investor homebuyers. This could result in a pricing “bubble” pop.
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