Fitch: Price Gains May Be Too Rapid in Certain Markets

In some markets, the recent home price gains may actually be too rapid, leading to concerns of a market imbalance that could eventually stall or reverse the positive trend, according to an analysis from ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp.

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While the unemployment rate is trending down and low mortgage rates are helping with affordability, certain areas are seeing prices accelerate far beyond job growth and incomes.

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This particular problem has been especially notable in markets that have not fully recovered from the previous bubble, which includes several cities in California, the agency found. Los Angeles, for example, has seen prices rise by more than 10 percent over the past year, but the unemployment rate is above 10 percent and real incomes have fallen over the past two years, Fitch stated. At the same time, prices have shot up 75 percent above pre-2000 levels.

One factor driving up prices is the constrained supply of homes for sale, which according to Fitch, is ""artificially"" low.

""[R]ecent regulations have limited the pace of foreclosure sales and the large percentage of underwater borrowers continues to hope for further price increases to be able to sell their homes at a profit,"" Fitch explained.

In areas where there is strong institutional investor demand, the ""supply-demand imbalance is even more pronounced"" as more buyers compete for the limited supply, the agency explained.

Fitch also described demand from borrowers as ""artificially high,"" and said it believes demand will subside once ""pent-up"" demand is satisfied.