Home prices showed that the New Year brought the same, solid increase in home prices from last year.
The Case-Shiller 20-City Composite Index, a measurement of home prices in 20 American cities, showed a year-over-year increase of 5.7 percent in January.
The rise in prices is more than twice the rate of inflation and is most due to the short supply of existing homes and strong demand.
David M. Blitzer, the managing director and chairman of the Case-Shiller Index Committee, said that the low inventory of homes “means that would-be sellers seeking to trade-up are having a hard time finding a new, larger home,” which results in fewer sales and higher prices.
The housing market collapsed in 2008, housing prices went with it. When the value of homes went down, homeowners lost equity in the value drop and some people saw their homes become “underwater.” An underwater mortgage means that the remaining debt owed on a mortgage is higher than the value of the home. This means they could not sell their home if they needed to get from under the payments. They were also unable to refinance their mortgage to get a lower rate on the mortgage or tap into the homes positive equity to get some cash.
So as the mortgage market started to rebound, so did home prices. The rate of underwater mortgages went from 27.8 percent in 2012 to 13.2 percent in 2015, according to RealtyTrac. This also tracks with the value of prices going up. The 20-City Composite Index has increased by 12.9 percent from October of 2008 to the beginning of 2016.
This is good for the larger economy for two reasons: the Great Recession was caused by the collapse in the housing market and as housing started to heal, so did the economy. The second reason is people feel more economically secure when their homes have strong value, which gives a comfort for people to spend more.
The historically low interest rates coupled with an improving jobs market and rising wages, the housing market should continue to grow, said Christophe Barraud, the Chief Economist Strategist for Market Securities
“The fact is that the labor market gives Americans the confidence and the ability for younger people to strike out on their own,” said Barraud.
However, Blitzer suggested that a weakness in the market is that first time buyers who have high credit card or student loan debt are having a hard time getting credit to purchase homes.
Determining how big of an impact student loan debt is having on the housing market is hard, said Sal Guatieri, Senior Economist and Director of Economic Research at BMO Capital Markets.
“Elevated student debt is clearly a factor that could prevent a potential buyer from getting a loan,” said Guatieri. “However, mortgage lending standards have been easing for the past three years,” although they rose from very tight lending standards stemming from the bursting of the housing bubble.
Even though supply is at low levels, housing starts increased in February to eight-year highs. Housing starts are new homes built and a rise in starts shows growing demand for new homes. Guatieri believes that the upward trend of housing starts will continue for the rest of 2016 “as long as interest rates remain low.”
As long as the employment situation remains healthy, and interest rates and the supply of homes stay low, the housing market should show similar levels of growth when the February numbers come out.