Wall Street Journal: How Rising Prices Could Boost Housing Demand in 2013

2013: How Rising Prices Could Boost Housing

The Wall Street Journal
December 18, 2012, 8:00 AM

Home prices finally hit a bottom in 2012. So will 2013 be the year of recovery or relapse? This is the second in a series of blog posts about where housing is headed next year.

Potential buyers now have something they haven’t had in a long time: urgency (save for a few months when the government was paying people to buy homes with a first-time home-buyer tax credit). This next year will be the first time since 2006 where prices ended the previous year in positive territory. Surveys already show that buyers’ expectations of future home prices have improved throughout the past year.

Just as falling prices have frozen buyers and sellers in place in recent years, housing strength may be even stronger than current indicators show given the powerful shift in sentiment that price increase may bring.

“Every single thing about housing is flashing green,” said James Dimon, chief executive of J.P. Morgan Chase, in an interview with CNBC last month. Household formation is rising, inventory is falling, and affordability is near a record high.

Homeowner vacancy rates have been dropping and were down to 1.9% this fall, near the long-run average of 1.6% and down from a peak of 3% in 2008, according to Goldman Sachs . Meanwhile, rising rents are likely to encourage more renters to buy. Finally, low prices and unattractive returns on other assets have fueled enormous investor demand for housing. While investors have begun to pare back in some of the hottest markets, such as Phoenix, they’ve been on a tear in others, such as Chicago and Atlanta.

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