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Report Examines Sustainability of Price Gains in Recovering States

Certain states are seeing above average gains in home prices, but concerns have been raised that some states are seeing ""unsustainable, investor-fueled"" increases, ""Capital Economics"":http://www.capitaleconomics.com/ pointed out in a recent report.

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In response to those uncertainties, the research firm conducted an analysis of seven states plus the District of Columbia to see if price gains are merely investor led or truly sustainable.

Out of the 8 places covered, the firm concluded five states appear to be sustainable based on factors such as income and employment growth.

""[W]e think that in most of these markets, the fundamentals are supportive of a sustained housing recovery, not just a temporary rebound,"" the report stated.

The seven states the research firm observed were Arizona, California, Florida, Idaho, Nevada, North Dakota, and Utah, plus D.C.

While the ""Federal Housing Finance Agency's (FHFA) index"":http://www.fhfa.gov/webfiles/24676/2012Q3HPI.pdf registered a 4 percent year-over-year gain in the ""third quarter of 212"":https://themreport.com/articles/fhfa-reports-modest-price-growth-in-september-2012-11-28, those particular states saw even higher gains, ranging from around 7 percent in California and Florida to 20 percent in Arizona during the same time period.

In the analysis, the states that were of particular concern to Capital Economics were Arizona and Nevada, as well as D.C.

In Arizona, prices have recovered 20 percent from their trough, while Nevada has recovered 12 percent from its bottom.

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However, the firm pointed out that ""[e]mployment in both States has risen less than 2% from its floor, and personal income growth has also been trailing the national recovery.""

In addition, the firm looked at housing permits per capital relative to usual levels to determine homebuilder confidence in those markets.

Based on its findings, the firm noted homebuilders seem to be reserved when it comes to the recovery in Arizona and Nevada, with construction activity in those states about a third of the usual level.

""The reluctance of homebuilders to break new ground in these States is a legacy of the overhang of existing homes, which we think will persist for some time to come,"" the report stated.

On the other hand, the firm had fewer concerns about California, Florida, Idaho, and Utah, stating that ""while house prices have outperformed in these States, so too have personal incomes and employment.""

Capital Economics also expressed confidence in North Dakota, with mixed assessments of D.C.

In North Dakota, prices have risen 18 percent from their trough, while personal income and employment also appeared to be strong, standing 36 percent and 6.5 percent above their respective troughs.

D.C. has seen prices increase 23 percent from its bottom and homebuilders have a ""good degree"" of confidence in its recovery, but prices appears to be overvalued.

""Housing in the capital looks to be around 30% overvalued relative to incomes, suggesting that it may now be due a period of underperformance, especially if federal spending cuts take the heat out of the local labour market,"" the report stated.

Thus, based on Capital Economics assessment, the recovery in California, Florida, Idaho, North Dakota, and Utah seems to be sustainable, but concerns remain for the other states.

""We think the exceptions are Arizona and Nevada, whose housing markets remain at risk if their economic recovery continues to disappoint. Moreover, D.C's market is at significant risk of overheating if it doesn't slow soon,"" the report stated.

About Author: Esther Cho

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