Inflation and wage growth may be stagnant, but home prices are taking off.
Not only are they up 6.5% over the past year, according to the closely watched S&P Case-Shiller home price index, but a new survey indicates they are going to rise even higher.
A poll of 45 analysts forecasts that housing prices will rise another 5.7% this year, Reuters found. More than 80% of the analysts expected the supply of affordable homes will either stay relatively flat or fall over the next 12 months.
Yet housing price increases come at a time when most consumers aren't making a lot more money.
The 6.5% increase found in the Case-Shiller Index is more than twice the rate of growth in the inflation indicator Consumer Price Index (CPI) and annual wage increase. Core CPI increased at 2.1% annual price increase in May. And the Bureau of Labor Statistics reported that annual wage growth reached 2.7% in April and hasn't exceeded 3% for the last few years.
Home price increases are driven by the shortage in supply and higher demand due to a robust job market, according to David Blitzer, managing director of Index Committee at S&P Dow Jones Indices.
Making matters worse, some cities are running out of space or imposing tougher building restrictions. "There is not much local land left to build houses and the zoning regulations are getting stricter,' Blitzer said.
Yet despite rising prices, buyers aren't throwing away common sense when looking for a house. Some were burned by past housing downturns.
"People might not remember the stock crash in 1987, but anyone who owns a house would never forget the pain in the 2008 financial crisis when the housing market crashed,' he said.
There are other issues causing home prices to swell as well, said Jason Ware, chief investment officer at Albion Financial Group.
Homebuilding companies are having trouble recruiting workers because many left the sector and retrained for new positions. The new immigration law may also be a factor, Ware said.
Some of the hottest cites for housing price growth are those that have the tightest job markets.
For example, Seattle scored the highest annual gain on home prices among the 20 cities with 13% increase over the last year in the S&P Corelogic Case-Shiller Indices because there are many job opportunities, Blitzer said.
Chicago, by contrast, has the lowest gain because it has fewer jobs due to its sluggish economic development in the city. Chicago had the lowest gain at 2.8%.
After Seattle, cities that have seen the biggest growth in home prices are Les Vegas with 12.4%, San Francisco with 11.3%, Denver with 8.6% and Los Angeles with 8.1% in the 12 months leading up to March. All 20 metro areas survey showed gains.
"Low mortgage rates, growing new household formation and an improving economy and jobs market are key pillars supporting the housing market on the demand side and thus home prices," Ware said.
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