Home prices are rising at a historic rate, putting the dream of owning a home out of reach for millions of Americans.
According to the latest S&P CoreLogic Case-Shiller National Home Price Index, home prices rose at the fastest pace in 15 years. The index rose 11.2% in January, the highest annual gain since February 2006. The price growth is being fueled by a record low number of available homes for sale on the market.
“It’s a real crisis,” Moody’s Analytics Chief Economist Mark Zandi told Yahoo Finance. “We have a very severe shortage of homes, particularly affordable homes.”
The median price of an existing home sold during February was $313,000, up 15.8% from the same month a year ago, according to the National Association of Realtors. That’s the highest February price on record.
Bidding wars have been pushing prices up. And historically low interest rates last year also boosted home buying activity, further exhausting supply.
“if you are looking for a home, it’s becoming more of a stretch,” said Zandi.
Rising mortgage rates this year have been cutting into buyers’ purchasing power. Six weeks of increases have put the average rate on the 30-year fixed mortgage to a nine month high of 3.17%, according to Freddie Mac.
“Mortgage rates are off their all-time lows but still historically low,” said Zandi. “As interest rates normalize, mortgage rates start to go back up, this is going to become more so of a problem.”
The short supply of homes is a problem that started to develop in the wake of the housing bust and subsequent financial crisis of 2008-2009, according to Zandi. “It’s a pernicious problem, and it’s going to require a policy response to address it.”
He said “significant” restrictions by state and local governments on the use of land must be loosened to allow for more construction, and Zandi suggests using President Biden’s impending $3 trillion infrastructure plan as an incentive.
“If you want to get that money — state and local governments — then you need to change your land-use practices to allow for more affordable construction in your community,” said Zandi.
The housing market is currently overvalued, according to Zandi, and while he doesn’t believe we’re in a housing bubble yet, he admits that things “feel awfully stretched.”
“Another year from now, if we see prices increasing 10%, 15%, I think we will start to see markets getting infected by speculation and bubbles will start to develop,” he said.
Alexis Christoforous is an anchor at Yahoo Finance. Follow her on Twitter @AlexisTVNews.