A Wealth Effect That the “Rest” Of the Country Can Appreciate

Normalization of supply and demand has led to a welcome bump in home prices. The S&P Case-Shiller Home Price Index for 20 major cities has posted positive year-on-year gains for the past 11 months. April’s 12.1% gain represents the largest advance in the post-crisis era. Still home prices remain 26% below the market’s peak. A consequence of that is a large amount of homes still underwater, hindering the owner’s ability to enter the market for an upgrade or borrow against the home’s equity for some good old-fashioned personal consumption.

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The fact that prices remain so far below the market peak partly explains why existing homes inventory is at such a low level. Owners….well those not already tossed onto the street….may be willing to wait for prices to rebound rather than take the immediate hit by putting a house on the market. As prices rise, potential sellers…and there are lots of them…may be drawn into the market, which could act to keep a lid on any rapid price gains over the near term.  This is especially true as buyers would likely be unable to stomach higher prices given that other factors impacting the home-buying process…job security and access to credit….remain flighty at best.

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