The Federal Reserve expressed last Wednesday that it will begin pulling back from its stimulus program, which will eventually cause interest rates to creep back up. The Federal Reserve’s announcement caused a scare on Wall Street about the economy slowing after the stimulus program expires. Housing-related stocks dipped after the Federal Reserve’s announcement, with The Dow seeing a drop of 354 points last Thursday.
The housing market appears to be recovering, with homes being sold for well over the list price and prices practically skyrocketing from the stagnant prices of the year before. But, the recent spurt in home-buying may be causing the prices to rise too fast and too soon
“Some of the increases can be explained by the fact that it [the housing market] is recovering from an over-corrected situation,” said the Realtors’ chief economist, Lawrence Yun, to CNBC. “But with people’s income rising at only 1 or 2 percent and prices rising in double digits, it cannot continue.”
Partly to blame for the steep rise of the housing market is the drastic change in the mix of homes being sold. According to CNBC, homes priced below the $100,000 mark are down 9 percent from a year ago, while homes in the $500,000 range are up 33 percent. Short sales and foreclosures are also down at 18 percent from 2012, but surprisingly for areas that took the worst real estate hit in the housing market crash, such as Florida, Arizona, and California, bank-owned properties seem to be on the rise. But the real jump start of the housing market boost may be due to low mortgage rates and low inventory, which has sent home prices back up to market value and beyond, and encouraged new home construction.
With higher interest rates implemented, banks may be open to lending out more money, making it easier for consumers to buy the home they desire, while stimulating financial and job growth within the economy. However, with prices of homes climbing, wages barely increasing, and lenders loaning out more money, it could drive the market into the feared “market bubble”, where the prices experience severe inflation.
Although it seems the housing market is on its way to thriving, the economy is still very weak and low-interest rates have failed to stimulate significant economic growth. With interest rates potentially going higher while the economy is still fragile, the housing market will be unsustainable. Unless home prices and job wages can find a stable median, the U.S. housing market could be headed towards another meltdown.
Krysta is a writer and researcher with Ring of Fire.