U.S. home prices to rise 7.2 percent as inventory growth continues to slow, report says

U.S. home prices will rise 7.2 percent annually in the next two years as slow inventory growth in places like Washington persists, and lower rates, accelerating wage growth and limited borrowing rates keep prices…

U.S. home prices to rise 7.2 percent as inventory growth continues to slow, report says

U.S. home prices will rise 7.2 percent annually in the next two years as slow inventory growth in places like Washington persists, and lower rates, accelerating wage growth and limited borrowing rates keep prices rising across the country, according to a new Fannie Mae report.

The forecast has slight variations from its last report and that of its chief competitor, the Standard & Poor’s/Case-Shiller home price indexes. Fannie Mae’s forecast is more optimistic than S&P’s forecast, which calls for 7.1 percent annual price growth over the next two years.

The U.S. housing market has been transitioning to the normalized price level of about $265,000, with about 4.1 million homes fetching that average price, according to CoreLogic.

As house prices rise and the pace of inventory growth slows, potential homebuyers are getting increasingly frustrated with rising prices. Real estate agents are reporting that homeowners are listing their homes at lower prices because they cannot close on the deal. Prices are rising faster in established markets like Boston and San Francisco than they are in new metros like Orlando, Phoenix and Las Vegas.

In some markets, the inventory shortage has led to what some are calling a home price bubble. Up to 70 percent of sales were at or above the asking price in 2015 in some California cities, according to new analysis by Moody’s Analytics. For new properties, those average asking prices were $500,000 in 2014, up from $400,000 in 2011.

“It’s easy to confuse monetary policy for conventional economic activity,” stated Bob Walters, chief economist at Fannie Mae. He said the average term for 30-year mortgages now runs about four years because of declining rates and higher loan limits. “With very little new inventory, prices will continue to grow,” he said.

In Washington, home prices are rising faster than in much of the country. Last year, they grew 11.8 percent. The housing market there is still recovering from a 2012-13 housing price crash, in which more than 80 percent of all sales were at or below the asking price. Washington County, a core central region where 25 percent of the nation’s population resides, is like much of the country in that its house prices are driven by the local economy, according to Jerald Williams, director of the University of Maryland’s local government and economic policy center.

“If the income level grows, then people feel more comfortable buying,” Williams said. “If they feel more secure in their income, then they are willing to go higher.”

Although the number of sales of existing homes and condo units has returned to pre-crisis levels, prices rose faster than the number of listings, Williams said. The wide disparities have led to a lot of sellers competing for a relatively few buyers. Williams thinks the supply shortage will persist through 2018.

The share of actively selling properties was 80 percent in February 2016, according to real estate listing company Redfin. That is up from 77 percent in 2014, Redfin notes. Its median price last month for existing single-family homes was $491,000, up 12.5 percent from a year earlier.

In a filing with the Securities and Exchange Commission on Tuesday, Fannie Mae said the average rent was $1,443 per month in January, up 4.8 percent from a year earlier. That price is expected to climb a bit more in the next two years.

“We’re entering the primary market of renters,” said Jonathan Smoke, chief economist for Realtor.com.

Some millennial buyers have been affected by rising property prices. Of those entering the market, only about 10 percent had down payments of at least 20 percent. About half of those who owned their current homes owed more than their home was worth at the time of the sale, according to government statistics.

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