Report: Recent Price Gains Bound to Slow

Low inventories driven by reluctant sellers, high levels of underwater homeowners, and meager rates of new construction have all played a role in driving home prices upward of late, ""Radar Logic"":http://www.radarlogic.com/ explains in its RPX Monthly Housing Market Report for April.

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As of April 2013, the analytics firm's 25-metropolitan-area composite averaged $205.46 per square foot, up 13.1 percent year-over-year and up 2.7 percent month-over-month.

This translates into a gain of 23.7 percent from the January 2012 low of $169.62. Prices though are still 26.2 percent below the June 2007 peak.

Over the years, distressed sales and REO inventory have also played a major role in impacting national price gains. Foreclosure and REO sales increased from a small minority of sales--about 5 percent--to more than one-third of home sales--about 35 percent--between 2007 and 2009, according to the New York-based analytics firm.

Recently, however, these sales--termed ""motivated sales"" by Radar Logic--have declined somewhat drastically. From February of last year to April this year, REO sales declined from 26 percent of all home sales to 11 percent.

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""As motivated sales declined as a percent of total sales, aggregate price metrics increased faster than supply and demand analysis would suggest they should,"" the RPX report read.

Without the change in share of motivated sales, Radar Logic suggested its 25-MSA RPX Composite price would likely demonstrate an 11 percent increase year-over-year in April as opposed to the 13.1 percent gain the index currently reports.

Looking forward, Radar Logic predicts the recent price gains will dissipate. ""Eventually, rising prices will reduce demand and attract supply to the market and reduce the rate of price growth,"" Radar Logic stated in its report. ""However, it is not clear how long this will take.""

The distressed market could experience another uptick in inventory as Fannie Mae and Freddie Mac release some of their REOs onto the market, according to Radar Logic.

With about 1.7 million delinquent properties on their books, the GSEs' REO inventory is likely to grow. Given that the GSEs aim to reduce their REO inventories ""[i]f prices continue to rise, we would expect more of the existing shadow inventory to reach the market, potentially easing prices,"" Radar Logic stated.

Rising prices will also deter investors, which have made up a significant portion of home purchases since the housing crisis, and not only will investors slow down on purchasing, they may also begin to try selling properties.

""The result could be a significant decline in demand accompanied by an increase in supply, which could cause prices to reverse their current upward trend,"" Radar Logic said.

Also contributing to demand, rising prices may encourage some homeowners to sell their homes. Whereas, traditionally, these sellers would then become buyers, today's market may push these homeowners into renting as a result of declines in personal wealth, damaged credit, and ""the psychological trauma they have endured due to falling home prices in the past.""