The U.S. housing market's red-hot recovery from the depths of the crash five years ago is fueling concerns among economists and real-estate brokers that home prices are overheating.
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A dearth of new construction and strong demand from buyers are pushing up prices twice as fast as the rate of income growth, the latest data show, a level economists said is unsustainable.
The S&P CoreLogic Case-Shiller U.S. National Home Price Index released Tuesday showed that in February home prices rose 5.8% from the same month a year earlier. That put prices nearly 40% above their level at the bottom of the housing crash in February 2012.
At the same time, incomes rose just 3% in February from the same month a year earlier, and are up 12% since February 2012, according to the Labor Department.
Some local markets have experienced extreme swings. Home prices in San Francisco have vaulted 98% from their low point during the bust and now stand nearly 7% above their earlier record in 2006 at the height of the previous housing boom.
In Dallas, home prices have risen by 52% from their low during the recent bust and are now 35% above their previous high. In Denver, prices are now 59% above their previous lows and 36% above their previous high.
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In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don't appraise for the asking price and even waiving their right to home inspections.
"It can't be sustained," said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, of the frenzied buying. "It can't go on forever."
During a bubble fueled by low interest rates and easy access to credit, home prices soared to highs in 2006 before tumbling 27% over the following six years.
One of the main drivers of the current price gains is the lack of home construction. Labor shortages, zoning regulations, a lack of available land and caution among builders have kept a lid on construction activity in recent years. The supply of homes for sale in March was down 6.6% from a year earlier, the National Association of Realtors reported last week.
Now, even as the nine-year anniversary of the current economic expansion approaches, the level of home construction relative to the number of U.S. households is at its lowest level since the U.S. Census Bureau began tracking such data in 1957, according to an analysis by the Federal Reserve Bank of Kansas City reported earlier this month.
To be sure, there are few signs of an imminent housing bust that would lead to steep national declines in home prices, economists said. Unlike the last boom, lending standards are stricter, and many buyers have pristine credit scores and are putting down large down payments, agents said.
What's more, while prices have risen rapidly over the past several years, that is partly because they were making up ground lost during the bust.
With little risk of a supply glut in the near future, economists generally expect prices to continue rising quickly in most markets for a couple more years, if the economy keeps expanding.
They said it is more likely that overheated markets are headed for a long period of flat or slightly declining home prices, especially if mortgage rates rise or job growth slows, but not an outright crash.
The market "is not going to burst, it's going to contract" with falling sales volume, said Nela Richardson, chief economist at Redfin. "You might still see what looks to be a robust market because prices are really strong, but that doesn't mean it's a broad market."
Nonetheless, home prices are starting to look frothy for the first time in years. Nationally, homes are about 4% overvalued, meaning prices are slightly above the long-term trend line between household incomes and mortgage costs, according to Mark Boud, chief economist at Metrostudy, a housing research firm.
Some markets are in trickier territory. The Denver market is 8% overvalued, while the Bay Area is 8.5% too pricey based on Mr. Boud's analysis.
Most overheated markets have supply shortages. Nationwide, there is a shortage of about 3 million homes, Mr. Boud said.
The markets Mr. Boud said are likeliest to experience trouble soon are those in which prices are too high but there aren't significant supply shortages. Dallas, for example, is 10% overvalued but just 2.5% undersupplied.
"[Dallas] is going to hit the skids sooner than most markets," Mr. Boud said. "Right now jobs are still strong but prices are outpacing even the job market."
There are other signs overexuberance. The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns.
In Denver, homes are selling briskly. The median number of days homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to real-estate company Redfin. Home prices rose 8.5% in Denver over the year ended in February, Case-Shiller said Tuesday.
Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price.
"It's just crazy," she said.
Martin Mata, a Redfin agent in Denver, said his buyers often will commit to kicking in extra cash if the bank's appraisal comes in lower than the purchase price. "We've got to be coming close to a plateau for prices," he said.
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April 25, 2017 10:07 ET (14:07 GMT)