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Rising Home Prices Creates Barriers for Buyers

prices-upWith no sign of slowing down, home prices and scarce inventories in the U.S. are placing a hold on the homebuying process for many first-time buyers. However, despite the bleak financial picture, there may be a few hopeful signs in the housing market.

The S&P/Case-Shiller U.S. National Home Price Index (HPI) released Tuesday found that home prices rose 5.4 percent year-over-year in January 2016.

The index also showed that the 10-city composite rose 5.1 percent for the year. Meanwhile, the 20-city composite’s year-over-year gain was 5.7 percent. According to the report, after seasonal adjustment, the national index, 10-city composite, and 20-city composite rose 0.5 percent, 0.8 percent, and 0.7 percent, respectively, from the prior month.

“Home prices continue to climb at more than twice the rate of inflation. The low inventory of homes for sale -- currently about a five month supply–means that would-be sellers seeking to trade-up are having a hard time finding a new, larger home," Blitzer stated. "The recovery of the sale and construction of new homes has lagged the gains seen in existing home sales. This may be starting to change: starts of single family homes in February were the highest since November 2007. The single-family-home share of total housing starts was 70 percent in February, up from a low of 57 percent in June 2015, and approaching the 75 percent to 80 percent range seen before the housing crisis."

"The issue is availability of credit for people with substantial student or credit card debt. While rising home prices are certainly a factor deterring home purchases, individual financial positions are more important than local housing market conditions." 

David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices noted that financing a home continues to be a hurdle for first-time homebuyers as low inventories and short supply cause home prices to rise.

“While low inventories and short supply are boosting prices, financing continues to be a concern for some potential purchasers, particularly young adults and first time home buyers.," Blitzer said. "The issue is availability of credit for people with substantial student or credit card debt. While rising home prices are certainly a factor deterring home purchases, individual financial positions are more important than local housing market conditions. One hopeful sign is that the home ownership rate, at 63.7 percent in the 2015 fourth quarter, may be turning around. It is up slightly from 63.5 percent in the 2015 second quarter but far below the 2004 high of 69.1 percent."

On a month-over-month basis, the national index, the 10-city composite, and the 20-city composite all remained unchanged in January before seasonal adjustment, while after seasonal adjustment, all three composites reported strong advances. According to S&P, 11 of 20 cities reported increases in January before seasonal adjustment and after seasonal adjustment, all 20 cities increased for the month.

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Click here to view the full report.

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