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Is a 15 Percent Increase in Home Prices a Good Thing for Housing?

by Peter Thomas Ricci

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Lawrence Yun of the National Association of Realtors is projecting that home prices will increase by 15 percent in the next three years, but will such an increase impact housing affordability?

By Peter Ricci

Lawrence Yun, the chief economist of the National Association of Realtors, is known for his optimistic predictions about the housing market, and he just recently made another notable projection: home prices, according his projections, will rise by 15 percent over the next three years.

Though such numbers are welcome news for housing – after all, prices have dropped by more than a third since 2006 – there is an interesting dimension to the home price increases, and how they impact housing affordability, that gives Yun and other analysts some pause.

Home Prices and Housing Affordability

We should point out, Yun is not alone in his positive projections for home prices. The CoreLogic Home Price Index and the Case-Shiller Home Price Indices have all been running positive in 2012, and by promising amounts. From January to August (the most recent month of data), the Case-Shiller has increased by 7.7 percent, while the Home Price Index has risen by 9.3 percent from January to September.

The key concern for Yun is that as housing prices continue to rise, they will impact housing affordability, which has been a big selling point for housing as prices have declined and made homeownership more attractive than renting.

As the Wall Street Journal recently wrote, classic supply and demand is a big part of that equation. Home sellers are holding off on listing their properties, opting to wait for prices to increase further in the next year or so, and that’s placed a premium on the few active, non-REO homes that are on the market (with bidding wars a common result). So, as the supply has dwindled, and demand has stayed high, prices have increased.

New Housing Construction and Home Prices

The responsibility for adding more housing inventory, Yun explains, therefore falls on homebuilders, who can construct more new housing, increase inventory levels and hold any radical increases in prices in check.

“Builders need to add more,” Mr. Yun said at NAR’s annual conference, according to the Journal. “We need to moderate the price growth.”

Of course, the matter of active housing inventory is not a simple matter of snapping one’s fingers and expecting homebuilding to increase. As we’ve written before, homebuilders have new costs to consider in the current economic climate, and the Journal lucidly points out that even the homebuilders who are building are doing so tepidly, in case the economy slows down in 2013.

So where do you see home prices going? Will homebuilders ramp up production, or maybe more sellers will list, as consumer confidence increases? Let us know in the comments section.

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