As housing inventory continues to drop and sales continue to increase, we are beginning to see annual home price appreciation approach double digits in select markets. While it is exciting for those thinking of selling their homes to hear stories of new listings getting bid up over list price and being put into escrow within days of going on the market, we are reminded that this is not necessarily evidence of a sustained and healthy market recovery. As reported in Investors Business Daily on February 14, 2013, this may instead be a sign of another bubble forming within the larger housing market.
Buyers should beware that data showing signifcant year over year price increases may be indicative of substantial activity from investors and flippers.
Over the past 18 to 24 months, investors have been snapping up foreclosures at liquidation prices, fixing them up and then reselling them. However, most home price indexes don’t take into account the renovation costs. For example, if an investor purchases a home out of foreclosure 12 months ago for $150,000, invests $50,000 to fix it up and then sells it for $230,000. This will show up in the local market statistics as a 53% increase even though almost 2/3 of the appreciation was due to the improvements. It only takes a few foreclosure flips in a local market to skew the averages and make price appreciation in that market appear much higher than it truly is. As such, both buyers and sellers need to be aware of what data is behind the statistics before buying into significant price increases in a local market.