Two Housing Markets Yield Two Price Trends -- Big Picture

 
   By Kathleen Madigan 
 

        If the recent rise in existing-home prices is unhealthy, then maybe new-home prices should be in the ICU.
        When discussing Wednesday's news that existing home sales increased 6.1% in March, the National Association of Realtors chief economist Lawrence Yun said the 7.8% yearly rise in March's median price was unsustainable.
        "This price gain of near 8% is not healthy, considering people's incomes are only rising by 2%," said Mr. Yun. "The only way to relieve housing cost pressure is to have more homes coming onto the market."
        Research done by economists at TD Securities show the uptrend in resale values is nothing compared to the speedy rise in new-home prices.
        New homes generally command a 10%-20% premium over existing houses because new construction tends to be of higher quality and have more up-to-date amenities, the report said, but by 2014, the price gap between new and existing houses had widened to 40%.
        What's behind the bigger spread? The housing bust and consumer preferences, says Gennadiy Goldberg, a U.S. strategist at TD Securities.
        After the financial crisis, "many existing homes were in foreclosure or in poor maintenance," said Mr. Goldberg. "Buyers wanted a discount."
        That bargain-seeking plus the flood of existing homes into the market caused the median resale price to plummet by about one-third during the bust. In fact, even at $212,000 in March, the median resale price is below the $230,000 record set during the boom.
        Meanwhile, the median price for a new home fell only about 25% during the bust and surpassed its boom peak way back in early 2013. That's because home builders cut back drastically on single-family housing starts during the recession. Plus, as household finances stabilized, "consumer preferences changed. Consumers wanted a new home," said Mr. Goldberg. Tight inventories allowed builders to lift prices.
        As with most consumer items, the mix of new homes has changed in this expansion which has shifted prices a bit. Although homes costing below $300,000 still hold a slim majority of all new homes sold, the growth sector has been more luxurious residences. Homes costing $500,000 or more accounted for almost 11% of new homes sold in 2014, up 8% in 2011.
        The price premium that builders can get for new homes suggest housing starts will pick up this year, as long as wage growth accelerates as economists expect.
        The lagging rise in existing-home values, however, means smaller gains in household wealth. That will be especially true for lower-income homeowners who count their house as their largest financial asset. That should hold back the growth in consumer spending, said Mr. Goldberg who thinks home prices will increase between 4% and 5% this year and next.
        Kathleen Madigan, a special writer, is the primary author of the Big Picture column. She covered the economy for almost two decades at BusinessWeek and worked in the economics departments at several Wall Street firms.
        Write to Kathleen Madigan at kathleen.madigan@wsj.com.
        (END) Dow Jones Newswires

        April 23, 2015 07:35 ET (11:35 GMT)

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