Dallas Home Prices Are up 10.4 percent YOY, But Are We Getting Bubbly Again?

(Graphic: Courtesy of CoreLogic)

Lots of conflicting reports are circulating lately, some of them say our region’s real estate market, along with the U.S. at large, is poised for unprecedented growth in prices. Others claim that relying on the real estate market to support our nation’s financial comeback is a huge mistake.

CoreLogic’s most recent HPI shows a 10.4 percent year-over-year increase in Dallas-area home prices, with national figures coming in at 10.5 percent year-over-year. The April 2014 HPI report shows Dallas among eight other U.S. metros that posted double-digit growth over the previous year ending in April, with Riverside, Calif., posting a gargantuan 19.7 percent increase in first, Houston coming in third at 14.7 percent YOY, and Dallas coming in seventh.

“Home prices are continuing to rise as we head into the summer months,” said Anand Nallathambi, president and CEO of CoreLogic, in a June 3 press release. “The purchase market continues to suffer from a dearth of inventory which we expect will continue to drive prices up over the year.”

But is that necessarily a good thing? Is our new normal a shortage of available housing in key sectors? And how do we stave off another recession?

If this concerns you, then perhaps this article from Keith Jurow, a real estate analyst and publisher of Capital Preservation Real Estate Report, will resonate with you. Here’s the basic point that Jurow makes, namely that home buyers aren’t trading up from starter homes as they used to, cutting the inventory down sizably:

During the roughly 50 years of rising home prices, the first-time buyer was the foundation of the housing market boom. This younger buyer would purchase a home which was smaller and less expensive than most houses. That would enable the seller to “trade up” to a larger, nicer home. These trade-up sellers would then buy and enable another trade-up buyer to do the same.

This trading up was possible because the seller almost always posted a profit on the sale of the house and could plow that into a more expensive home. When the bubble finally burst in late 2006, speculators dumped their properties on the market in metro after metro and prices no longer rose.

Listings soared and sales slowed down even in the hottest markets. Then prices began to decline. That posed a serious problem for the trade-up buyer. Many of them found that they had little or no profit with which to buy another home. A growing number found themselves “underwater.” Because they had put little or nothing down, the value of their home was less than the mortgage on the property.

Making matters worse was that after the sub-prime collapse in the spring of 2007, lenders finally tightened up their underwriting standards. They began to demand down payments as in the pre-boom days – 20% or even more. With little or no profit garnered from selling, would-be buyers could not come up with such a steep down payment. Nor could the first time buyer.

And so the trade-up game came to a screeching halt. It has never returned. You need to understand that it will not be coming back. Do I mean never? Not quite. My answer — not for a long, long time.

It’s under this assumption that Jurow advises that investors divest themselves of their properties before the market weakens. This advice, of course, could result in a flood of inventory on the market, which could drive prices down. It’s a balancing act, for sure, but considering the Dallas area and our inventory woes, it would be better for many buyers to have access to more potential properties at more affordable prices, rather than accept inflated prices as the new normal.

What do you think?