Zoom. That’s the sound of your home equity taking off into the stratosphere.
The National Association of Realtors (NAR) reported sales of existing homes last month zoomed to a yet another high — an average annual sales rate of 7.1 million units. According to the Commerce Department, sales of newly constructed homes were up again in April, to an annual sales level of 1.3 million units.
At this torrid pace, more than 8 million homes could be sold this year. But the real news is the rapid pace of home value appreciation. The median price of a new home jumped 6.1 percent to nearly $231,000, another new record.
Home building companies are feeling as flush as those in the energy sector. Toll Brothers (NYSE:TOL), a luxury homebuilder based in Horsham, PA, reported record results for the second quarter, with net income rising 135 percent to $170 million.
Existing homeowners had good news, too. The average sales price of an existing home jumped 15.1 percent in the past 12 months, to $206,000.
What’s propelling the sales? Interest rates are still at records lows (a 30-year loan can be had carrying an interest rate of less than 6 percent) and more Americans have jobs. The latest Gross Domestic Product (GDP) report recently revised the economy’s growth rate in the first quarter to 3.6 percent.
It seems like everyone is out looking for properties to buy. If you search Google for news stories about homeowner making big bucks when they sell, you’ll find plenty of anecdotal evidence – so much so it appears everyone is "flipping" properties for profit.
The Wall Street Journal recently interviewed a real estate investor who borrowed $25,000 against the equity in his home, worth $300,000, and started buying investment property. In less than a year, he says he has bought 9 investment properties with $1.4 million in equity and $2 million in debt.
A homeowner in the Atlanta metro area bought an 18-acre parcel at a foreclosure sale last year. She has now fielded an offer from a developer that will allow her to pocket $450,000 in profits from the sale. It was her first venture into real estate investment.
In North Carolina, a couple bought 3 properties in less than a year, and watched them rise more than 30 percent in value. Although they have no interest in selling, other investors regularly knock on the door to make offers.
According to NAR, nearly a third of all homes purchased last year were purchased by investors, a level some housing experts say is troubling. Typically, investors account for less than one-tenth of all housing sales.
Are we in a housing bubble? Federal Reserve Bank chairman Alan Greenspan says we’re looking at “froth” in the housing market. But other economists believe its possible local markets are experiencing housing bubbles that could burst given the right provocation.
What might that be? Losing an army or navy base, a factory or other major source of employment could hurt. A major terror attack in the U.S. could slow things down. If the price of oil exceeds $100 per barrel, that could put a lasting dent in the economy.
But until there is a reason for demand to slow, Greenspan’s froth could easily turn into a thick head of foam.>