What's the Significance of the Recent Increases in Home Prices?

 
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According to the S&P/Case-Shiller home price index, typical home prices in July “rose” to the level of nine years ago . . . not exactly a sterling achievement, especially when compared to the boom times of just a few years ago. However, the increase can be interpreted as good news for those who have seen their home’s value fall below the amount of their mortgage. And while it’s certainly not time to sing, “Happy Days Are Here Again,” the clouds that have darkened the housing market for the past five years may be showing some signs of dispersing.

 

What this means for the average homeowner is that home prices seem to have stabilized and that future increases are certainly possible. However, many experts believe that we’ll not see the rapid increases of the past decade for many years, with most predicting a period of tepid home appreciation for several years. (It’s probably realistic to expect price increases to average no more than two percent or so, basically keeping pace with inflation.

 

And, speaking of inflation, let’s look at what the recent rises in home prices actually mean in dollar terms. For instance, if you bought a home in 2005 and are able to sell that home at or near the original purchase price, many would consider that a “break even” deal. What they may fail to consider is that the dollars they will receive in 2012 have lost approximately eighteen percent of the purchasing power they had in 2005, so a “break even” deal may be far from that, once inflation is factored in. In most areas of the country, homes will fail to recover the value lost during the housing crash. The dollars reaped from the average sale will reflect a significant loss of purchasing power when those dollars are spent.

 

In the end, of course, we cannot accurately predict inflation rates for the coming years—there are just too many variables—but we can assume that home prices have probably reached their bottom, relative to the true value of the dollar.  And while future spikes in inflation might appear a godsend to struggling homeowners, they may only serve to keep those owners from losing additional equity.

 

So, what’s the significance of the recent increases in home prices? The answer may be two-fold. Those who may be considering a home purchase may find that now is as good a time as they’ll see, with many areas experiencing inventory shortages due to investor purchases. Existing homeowners may find that the hemorrhaging of home prices has ceased; and while their “investment” is unlikely to reap the returns anticipated, their remaining equity should be secure. 

 

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"What's the Significance of the Recent Increases in Home Prices" - originally published at The Housing Guru Blog