By David F. Seiders. Ongoing increases in home prices have continued to fuel speculation in the media and certain circles about development of price "bubbles." The NAHB has been fighting this theory all year on analytical grounds (see "Concerns Overinflated"). In July, we decided to get perspectives on home prices directly from single-family builders, so we conducted a survey of about 300 builders from all regions of the country.
We first asked builders about recent and expected home price movements in their markets, and the results were broadly consistent with government data and the NAHB's short-term price projections, which put average price appreciation at 4 percent to 5 percent. Only 10 percent of the companies reported flat or falling prices during the previous year, primarily in the Midwest and West regions, and 35 percent reported price gains of more than 5 percent (including nearly 70 percent of builders in the Northeast).
Looking ahead, only 3 percent of the companies anticipated price declines during the coming year, 10 percent expected prices to be flat, and 31 percent were anticipating price gains of more than 5 percent. (55 percent were in the 1 to 5 percent range.)
Whether house price increases result in vulnerable "bubbles" depends heavily on the reasons for the increases. The NAHB has been arguing that persistent cost pressures have been pushing house prices upward and will continue to support prices in the future, factoring in the impact of rising building lot costs and land-use regulations.
Sure enough, a large majority of builders that reported price increases during the past year fingered lot costs (85 percent) or impact fees and other land-use regulations (64 percent) as key factors behind the price increases. About two-fifths mentioned "strength of buyer demand" as a reason for home price increases (multiple responses were permitted), but this ranked behind costs of labor and materials as well as the costs of lots and regulations.
We also gave builders the opportunity to describe their markets as sellers' or buyers' markets in another attempt to assess the vulnerability of house prices, on the theory that sellers' markets imply recent upward price movements that might be difficult to sustain over the longer term. Thirty-six percent of respondents said they have been in a sellers' market, and the frequency of this response was highest in the Northeast (60 percent) and lowest in the Midwest (16 percent). We also asked about the degree of buyer resistance to home price increases during the past year: Predictably, buyer resistance was strongest in the Midwest and weakest in the Northeast.
This survey supports the theory that house prices depend on the balance of supply and demand in the local market. A surge in demand can pull prices out of line from the underlying cost structure until the supply adjusts. Prices eventually converge to reproduction costs, and a rising cost structure puts persistent upward pressure on prices over the long term.