real estate

Survey: Americans upbeat about home prices

An uneven recovery

Thanks to the intrinsically localized nature of real estate markets, the recovery in housing values hasn't benefited all areas equally, says Chris Leinberger, a professor at the George Washington University School of Business and chairman of the school's Center for Real Estate and Urban Analysis.

Home values in areas that are high-density, urban and walkable have tended to rise faster than real estate in low-density, suburban areas where you have to drive, says Leinberger.

"Those two markets are going in two different directions, because we've overbuilt drivable suburban, which was the ultimate cause of the Great Recession, and of the mortgage meltdown," Leinberger says. "Drivable suburban, particularly on the fringe, collapsed … while walkable urban went down a little bit but basically went flat, and that's where most of the price appreciation in the future will be taking place."

And while it may seem odd considering that many blamed the housing crisis on rampant overbuilding, a sharp decrease in homebuilding after the financial crisis has actually created a shortage of available homes in some areas, says Leinberger.

"There's pent-up demand for walkable urban products for many, many years to come," he says.

Not all is well in real estate

Despite the recent good news, the housing market has a long way to go before it receives a clean bill of health and stops being a drag on the economy in many areas, says Baird's Delwiche.

"The percentage of people that are still underwater in their homes is still quite high," Delwiche says. "You can step back and see that home values have increased over the past year pretty well, but you look at overall price levels and there they still haven't recovered much of that big decline from the financial crisis."

Where those values go over the long term depends a lot on supply and demand, says Albert Saiz, an associate professor at the Massachusetts Institute of Technology's Center for Real Estate.

The supply of houses is now tight in some places, because homebuilding dropped off sharply after the economic crisis. How high prices rise will depend on how quickly homebuilders in those areas ramp up construction of the types of homes people want.

"There's a huge lag now in construction, so it might take three or four years from the inception of a project … to the end," he says.

The level of demand for homes will depend on factors such as: employment, which gives consumers the means to make mortgage payments; and interest rates, which affect their capacity to borrow. If rates rise too quickly, it could lower demand and put a damper on the growth of home prices, he says.

"It's going to be a race now between interest rates and how fast the economy grows," Saiz says.


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