The latest data available on US home prices shows them continuing to skyrocket. The S&P Case-Shiller 20-city home price index rose 5.7% in June. National average home prices rose as well, up 5.8%, climbing to 4.3 points above their pre-financial crisis peak in July 2006.
Support for higher prices has come from two primary factors. The first is that borrowing costs remain historically low. Homebuyers base their affordability calculations on the average monthly interest payment. Since the bulk of the payments made on the standard 30-year mortgage comes in the form of interest payments, lower interest rates make it more affordable to purchase more expensive houses, as interest expense is reduced.
Secondly, housing supply continues to drop. Most new homes built today are upscale homes, pricing out many first-time homebuyers. Many single family homes have also been purchased by institutional investors for rental purposes, further restricting the supply of available homes for sale.
Despite the tightening supply, home sales continue to drop, exacerbated by the rise in prices. As prices continue to rise, and if the Federal Reserve continues on its present course of raising interest rates, housing demand will continue to fall. That’s not good news for homebuilders, and it could have ramifications on the greater housing market.
A fall in demand will eventually result in prices coming down, and falling home prices will affect current homeowners, especially those looking to take out home equity loans or otherwise cash in on their home equity. Whether that will be enough to burst the price bubble remains to be seen, but if it does then there will be a lot of retirees unhappy that the home price appreciation they had hoped for to bankroll their retirement didn’t pan out.