Home-price growth fastest in more than seven years

According to the article from the Wall Street Journal http://www.marketwatch.com/story/home-price-growth-fastest-in-more-than-seven-years-2013-10-01, home prices across the U.S. have accelerated to the fastest pace since 2006. Compared to last year, home prices have increased by 12.4%. The continued increase in home prices will eventually lead to a decrease in the quantity demand of homes. Also, the article states that the rising mortgage rates are starting to slow the housing price increase. A reason for the increasing mortgage rates is due to speculation stated in May about the Federal Reserve scaling back on its asset-purchase program. As a result, a 30-year fixed-rate mortgage has increased by one percentage point. Increasing mortgage rates will lead to a decrease in quantity demand for homes or shift the quantity demand upward on the demand curve. My wife and I are in the process of purchasing a home. We currently live in Lehi and hoped to find our new home in Lehi during the house search. However, the prices of homes in Lehi increased rapidly and we were priced out of the housing market there. Due to the rapid increase in homes, the quantity demand for homes in Lehi has decreased (quantity demand shifted upward on the demand curve) for people with a certain income and below. However, if mortgage rates decrease, the quantity demand can shift down and allow those individuals priced out of the market previously to purchase homes in Lehi.


Dr. Tufte said...

Amulek621: 82/100 ("quantity demand", "speculation stated", "rapid increase in homes").

Please clean up the link or I'll ding you for the 6 points.

Also, direct quotes from the article are permitted, but please put them in quotes.

Your use of terminology isn't correct, and it makes your overall position somewhat unclear. For example:

"... Home prices ... accelerated ..." Home prices do not accelerate. They go up or down. The rate of (home price) inflation can accelerate. The distinction here is like describing the movement of a car, with distance, speed, and acceleration: the three things mean different things. The same thinking applies to prices, inflation, and (inflation) acceleration.

The price increase may lead to a decrease in quantity demanded, but only if it is driven by supply shifting left. If demand is shifting right, price increases come with increases in quantity demanded.

"... Quantity demand shifted upward on the demand curve." What you are describing is a movement along demand. Shift is reserved for the entire demand moving left or right.

" ... For people with a certain income and below ...". Demand already incorporates this information. I'm not sure exactly what you were trying to say, but perhaps this is it: quantity demanded declined as people below a certain income dropped out of the market.

BOHICA said...

Having lived in both the St. George and Lehi area, I have seen first-hand the troubles of rising home prices. During the economic downturn which coincided with the bubble bursting on the housing market in 2007-2008, St. George was issuing housing permits at an alarming rate. Not only did the builders continue to build an outrageous number of homes, they did so while the inventory of foreclosed and short-sale homes cluttered the housing market.

With the recession in its beginning stages, the demand curve shifted quickly to the left while the supply of new, for sale, and foreclosed homes continued pushing the supply curve far to the right.

It is a little alarming to see how much new building has been taking place in the St. George area. Even with mortgage rates at a moderate level (historically speaking), and the inventory of unsold homes declining, I am not sure if our current economic situation can handle another surge in home value appreciation.

I'm sure there is some sort of elasticity correlation between mortgage rates and home sales. With the current debacle with our political leaders, this may cause future mortgage rates to rise, not to mention the stress being put on the economy as a whole. This could very well price would-be buyers out of the housing market and leave a fresh new inventory of unsold homes which will only slow down and restrain the economy yet again.

Vader said...

Over the summer, I had noticed the same thing occurring here in Salt Lake County. Houses were being listed for more than appraisal value, going under contract within a day or two of being listed on the market, and were going for asking price or even $1000 more. In fact, the house across the street from us sold for $50000 over appraisal price. Another home that was listed for $270,000, had so many offers in the first weekend of its open-house, that it went under contract for $370,000 My thoughts, however, are that demand over the summer was high due to a varying number of factors. Interest rates were still fairly low but the threat of them rising was on the horizon. Finally, the summer season is a prime time for families to relocate. Another contributing factor to the hot market was that supply of foreclosures and short sales was at a record low since the recession. I was a concerned that we were experiencing a little bit of the same bubble we experienced 5 and 6 years ago. However, it was short lived and things have settled down in the valley.

Dave Tufte said...

BOHICA: 50/50
Vader: 47/50 (I'm taking off once for two very minor grammatical mistakes).

BOHICA: It's not correct to say there's an "... elasticity correlation between mortgage rates and home sales". Correlation is something you calculate from columns of raw data, say in a spreadsheet. It's a summary statistic. Elasticity is more specific, and a lot more informative. It's an estimate of the relationships in the demand and supply that underlie the data used to calculate correlations. Saying that two things are correlated gives you little idea whether their relationship is driven by demand, supply, or both. Elasticity can clue you in about that.

Vader: I think you've got a mix of reasons here that collectively don't add up to much (you're not wrong ... I just can't see that the market's going one way or the other). Yes, expectations of interest rates are a shift variable, but demand isn't very elastic to them (higher rates don't so much cause people to buy less houses, just different ones). And yes there are seasonal factors, but they work through both demand and supply, and don't affect prices that much. Lastly, the number of foreclosures and short sales being down is signalling that this market might actually be behaving normally after several off years.

10-S Pro said...

I have been working in real estate for about 4 years now, and I have notice an increase as well.
It's difficult to say that prices and rates will continue to increase for sure, but if they do, there will most likely be a decrease in quantity demanded unless income increases as well.

Matt Walter said...

I generally agree with your assessment that prices increased at a significant rate through the summer, but I will note note that houses are listed and sold for prices higher and lower than the appraised value every day - as illustrated by an example in your post. In addition, appraisers use past sales data to help establish current estimated value, which can create problems in a fast moving market.

The value of a home to an individual is unique and depends on location, perception, history, taste, and other components.

Dave Tufte said...

10-S Pro: 47/50 ("I have notice an increase")
Matt Walter: 50/50.

I have nothing to add ...