WASHINGTON, DC-It is a good time to be a home seller again – finally. Or at least, it is not the depressing state of affairs that it was during the depth of the recession. The Standard & Poor’s/Case-Shiller home-price index showed that home prices increased 6.8% in December—the largest year over year increase in six years. Separately, Commerce Department statistics show that new-home sales rose 28.9% in January year over year.
In the big picture, this is a function of supply-demand fundamentals, says Christopher Tower, assurance partner in the Real Estate practice of BDO USA. Given the still shaky nature of the recovery, though, it is worth taking a closer look at what is driving these supply-demand factors.
One trend that Tower finds intriguing is the influx of investment into single-family home funds. For the past year or so larger, institutional players have been snapping up small portfolios of foreclosed homes. This activity “is sopping up available inventory and causing competition, which is affecting home prices,” he tells GlobeSt.com.
Another dynamic influencing home prices is the distorting effect the Federal Reserve Bank’s MBS buying program is having on interest rates. In short, the Fed’s monthly $40 billion MBS purchases are helping to keep rates low – which would be fine if these low rates weren’t masking the tighter underwriting standards the industry is moving toward. “Look at NAR’s affordability index,” Tower says – “it is at an all time. What is keeping home buyers off the market are the strict underwriting regulations.”
The new underwriting regulations by the Consumer Financial Protection Bureau that are scheduled to go into effect early next year will institutionalize what has become an industry trend anyway, Tower says. They are not that noticeable now, he says, because prices are rising and interest rates are low. Once interest rates start to rise, the affordable index will surely shift.