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House-hunting in 2017? You'll need a fatter wallet

The 10 hottest U.S. real estate markets in 2017
The 10 hottest U.S. real estate markets in 20... 01:15

What's on your TV? In many middle-class homes, programs about house-hunting now compete for viewers with sporting events, cooking shows and financial advice. Americans are house-hungry. And nothing proves this more than the latest figures from Black Knight's Home Price Appreciation (HPA) index, which in March tallied its highest monthly gain in nearly four years.

"By the end of March, prices were already up 2.3 percent since the start of the year, and we hadn't even gotten into the prime homebuying season yet," said Ben Graboske, chief technology officer for this Jacksonville, Florida-based financial services company. The pricing "acceleration" is broad-based, with 36 out of 50 states seeing it since the year started. Spring and early summer are the biggest seasons for home buying.  

Everyone agrees that home prices are rising, and that the cost of buying is increasing far faster than new homes can be built. Just two months ago, National Association of Realtors (NAR) Economist Lawrence Yun predicted a 4 percent increase in home sale prices this year. Yun has now upped his expectation to 5 percent.

Is anything wrong with this scenario? Not if you're a home seller. The economics of scarcity is on your side. "The number of homes on the market fell yet again in April, declining another 8.7 percent from last year," said Chief Economist Ralph McLaughlin of Trulia, which provides real estate listings and housing data. "Simply put, homebuyers are gobbling up inventory at a much higher rate than in the past. The most recent numbers show that the share of inventory that sells has climbed to 25 percent."

Calif. housing prices surge 02:12

Not only are homes selling faster, but new home construction hasn't kept pace with demand. Trulia estimates that for the market to "look normal," construction of new homes would have to double. In April, new home sales were only about 12 percent of total sales. The historical average is just below a quarter of all sales.

According to the NAR's Yun, homebuilding activity has been significantly less than historic norms for 10 years and will remain this way for another three to four years. So buyers who want a townhouse with new appliances may have to settle for an older condo with the laundry room in the basement.

Prices seem to be accelerating most in wealthy, tech savvy states like Washington, which saw a year-over-year 11.6 increase in Black Knight's HPA index. But the squeeze goes right down the ladder to the bottom.

Finding a house in foreclosure is becoming a lot tougher. In April, first-time home foreclosures were the "lowest on record dating back before 2000," according to Black Knight.

Another issue holding back homes from the market is that many are owned by landlords who see no reason to sell while rental demand is strong and vacancy rates are low. "The unloading of single-family homes purchased by real estate investors would go a long way in helping to relieve these inventory shortages," said Yun. "To date, there are no indications investors are ready to sell."

That strong rental demand means higher rents, which make it difficult for younger buyers to save for a down payment on a home. Potential buyers will need to dig deeper into their pockets for both the down payment and monthly mortgage fees. 

Sellers' housing market 01:54

And dig they will. "Housing demand looks solid, and job creation is up," said Yun. The May unemployment figure dropped to 4.3 percent, a 16-year low, down from 10 percent at the height of the Great Recession. "With the improving economy, young adults living with their parents are going to be looking for that home," he predicted.

How far will their budgets stretch? According to Yun, income has risen 10 percent in the last five years, but housing prices have climbed 40 percent during that time. "That's a four-to-one ratio between price and income," he argued. "At some point, we'll see a leveling off."

Not immediately, said Black Knight. Even though interest rates are slowly inching upward, "homes are still affordable from a historic perspective," said Graboske. It now takes almost 23 percent of Americans' median income to cover the monthly cost of a median-priced home, which is still below the peak of 35 percent of income required in 2006, and not quite the pre-crisis average of 27 percent from 2000 to 2005. 

The threat of rising interest rates could be driving prospective homebuyers into the market before they find themselves priced out of it.

While home prices are rising, the actual number of home sales and the mortgages to finance them have dropped lately. New home sales fell 11 percent in April from from March, according to Trulia, but they were up half a percent from April of last year. Mortgage originations tumbled 34 percent in the first three months of 2017 from the fourth quarter of 2016, according to Black Knight.

But Trulia's McLaughlin says there's no need to worry. The decline is due to the tight inventory and the slowing of new home completions in March, he said, but longer-term the housing market looks "solid."

Of course, it's more solid in some places than others. Oregon and Colorado, which were formerly the second- and third-fastest appreciating states in Black Knight's HPA, have seen "deceleration" over the past two months. And fundamentals also indicate that California, Hawaii and the District of Columbia may be getting a bit top-heavy in their home prices. 

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