Rapidly rising home prices in certain markets have sparked fears of another housing bubble, but Diane Swonk, chief economists and senior managing director for Mesirow Financial, says don’t go there just yet.
“In economics, price is the ultimate equalizer. Prices rise when something is scarce, and fall when something if plentiful,” Swonk said in a recent housing report.
In 2007 and 2008, home prices fell as supply grew. Now, five years later, tight credit market conditions, fewer distressed sales and reluctance by would-be sellers to list their homes have brought inventory to an eight-year low, according to Swonk.
“Prices have risen but not enough to persuade owners who are still unsure to get off the fence and list their homes for sale,” Swonk wrote in the report.
Despite recent increases, home prices remain about 30% shy of their 2006 peak. So, many potential sellers are choosing to renovate their homes and hope to eventually see a return-on-investment once home values increase.
In 2013, housing starts are expected to rise 33% to slightly over one million units. This will mark the first time that one million new homes have been built since 2007. But the even bigger news is the “return of the single-family market, which has been much more constrained than multi-family starts,” noted Swonk.
Additionally, home sales are expected to rise between 6% and 8% from December 2012 to December 2013, according to the report. Swonk says new home sales are predicted to outperform existing home sales because inventories are likely to remain more limited in the existing markets, while housing starts are forecasted to improve, as previously noted.
While some worry a bubble is forming, Swonk reassured them that we still have a long way to go to meet pent up demand, let alone any level considered “normal.”