Home prices in many American cities are rising at the fastest pace since the housing bubble but foreclosed and other distressed properties purchased for cash and eventual resale are a large part of the rush higher.
Sales prices in Phoenix from the Case-Shiller Index are up 23% over last December but that only brings them to 55% of the market peak in June 2006, and they are still 15% below the average of the last decade. Las Vegas, another vastly overbuilt market saw purchase price gains of 13% over the year, but even so the market level is just 43% of the August 2006 peak and a third below the 10 year average. Overall American home prices are 29% below the July 2006 apogee.
Sales of existing homes are the largest category of purchases. In January they sold at a 4.92 million unit annual rate, the fastest in two and a half years, but yet a third below the peak in September 2005 and 7% behind the 10 year average.
The amount of inventory, represented by the number of months it would take to clear at the current sales rate was 4.2 months, the lowest since January 2005 and just before the huge access of building in the final years of the housing boom. Most of that inventory has now been absorbed, either by individual buyers, or, in the case of Phoenix, by investors hoping to profit by the collapse in prices.
The scarcity of new homes is partially behind the rise in prices in many cities as investors compete for the few remaining units available at prices that are still well below the peak.
Construction of new homes, single and multi-family, has lagged far behind its historical average since the financial crash. In January firms poured foundations on 890,000 new homes at an annual rate, 23.6% more than the prior year. But over the past thirty years the U.S has built an average of 1.418 million new homes each year.
January's 890,000 housing starts were 37% below their 30-year historical average and 35% below the average of the decade from February 1983 to February 1992 of 1.431 million.
Over the past 20 years the US population has increased 30% from the 243 million average of that decade to the current figure of 315 million. Adjusting for the population growth of the last twenty years housing starts would have to more than double to 1.86 million annually to equal the rate of construction and economic activity of the 1980s and early 1990s.
The collision of the Federal Reserve zero rate policy with scarce housing inventory and the pent up demand of several years of consumer austerity and a growing population has produced surge in home prices in many markets.
But in order for the price gains to have the economic effect that Chairman Bernanke's intends, consumer will have to spend some of their new found home equity wealth and builders will have to start work on many more new homes, hiring unemployed carpenters, bricklayers and tradesmen.
Chief Market Strategist