Why U.S. Home Prices Have Been on a Tear

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In another sign the housing recovery is genuine, home prices soared the most in more than seven years in April in 20 U.S. cities.

The S&P/Case-Shiller index, released today, climbed 12.1% from April 2012, marking the biggest year-over-year increase since March 2006, and rose 2.5% from March to April.

“The recovery is definitely broad-based," David M. Blitzer, chairman of the S&P's index committee, said in a news release. "Recent economic data on home sales and inventories confirm the housing recovery’s strength."

Experts cited an improving job market, low mortgage rates, high demand and a shortage of housing on the market.

Meanwhile, new home sales rose a bit less than expected in May but climbed a whopping 29% compared with May of last year.

All 20 cities in the S&P/Case-Shillert index, which includes metropolitan areas, showed year-over-year increases in home prices.

San Francisco posted the biggest gain, 23.9%, followed by Las Vegas, at 22.3%. Atlanta, Detroit, Los Angeles, Miami, Minneapolis, Phoenix, Portland, San Diego, Seattle and Tampa showed double-digit gains.

Homebuyers in Bidding Wars

Home prices in Dallas increased 7.4%; in Washington, D.C., 7.2%; and in Cleveland, 4.8%. The smallest increase was in New York, at 3.2%.

Even with the increases, home prices aren’t rising fast enough to price buyers out of the market. Indeed, competition for homes has led to bidding wars in some places, including Los Angeles, Boston, San Francisco, Seattle, Washington, New York, Miami and Phoenix.  

And home prices haven’t even approached levels seen during the housing bubble.

Celia Chen, an analyst with Moody's Analytics, told Money Morning that home prices still remain 26% below peak bubble levels.

“The recovery’s alive and well,” Jed Kolko, chief economist at the real estate site Trulia.com, told Money Morning. “Prices continue to rise, new home sales are up and delinquencies and foreclosures are falling.”

Higher prices have also rescued many underwater homeowners.

Kolko noted an extraordinary statistic: It’s cheaper to buy than to rent in the top 100 U.S. housing markets.

At the same time, the inventory of houses available for sale has begun increasing as higher prices have prompted more homeowners to list their homes and more homebuilders to construct new homes.

And one of the nation’s largest homebuilders, Lennar Corp. (NYSE: LEN) reported today it beat analysts’ estimates for the three months through May as prices and sales increased.

Lennar Chief Executive Officer Stuart Miller said on a conference call today he wasn’t too concerned about rising interest rates.

“Interest rates are moving higher in the context of economic improvement,” Miller said. “We’re looking at a supply shortage, so that means that even in the context of rising rates and a better economy, we’re likely to see price increases and rental increases.”

Last week, a new survey of homebuilder confidence from Wells Fargo Bank and the National Association of Home Builders reached its highest level since 2006, and housing starts climbed 6.8% in May and 28.1% year to date.

Fitz-Gerald Wary of Recovery Signs

But despite what appears to be a positive outlook, Money Morning Chief Investment Strategist Keith Fitz-Gerald said he’s wary of an apparent housing comeback that he says is based on the Federal Reserve’s easy-money policy.

“I think [Fed Chairman Ben] Bernanke’s engineering another bubble and I believe any rise we’re seeing in housing prices is not actually reflecting a change in value,” Fitz-Gerald said.

“Stimulus has gotten us so far but now Bernanke needs to transition off the cheap drug that we know is capital,” Fitz-Gerald said.

He said speculative investors continue to buy up homes and that banks have held on to a lot of shadow inventory.

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