How Rising Home Prices May Actually Stall the Recovery
By Diana Olick, CNBC Correspondent
NEW YORK (CNBC) -- Home prices have been rising steadily for the past several months, but some fear the rapid increase could actually start hurting the housing recovery.
The reason is that the rise in prices is mainly due to investors, mostly large hedge funds, that have been swooping into the most distressed markets and inhaling properties as fast as their plentiful cash will allow. They are turning those properties into rentals, and getting anywhere from 8 to 12 percent returns on their investments, thanks to still hot demand. The trouble is, as home prices rise, those returns shrink.
"The worry with investment demand is that the very recovery in prices that it is driving will eventually reduce rental yields and undermine the investment case," warns Paul Diggle of Capital Economics.Today's housing recovery, much like the recent crash, is like no other. While home prices fell nationally for the first time in history, they are recovering locally at drastically different paces. Some markets are still in the red, while others are surging forward with double-digit gains. Those that are seeing the biggest jumps are largely the markets that saw the deepest losses. Witness Phoenix home prices up over 20% from a year ago on the S&P/Case-Shiller home price index. The huge influx of investors there shrunk inventories and created bidding wars, hence the price gains.
More from CNBC
New Home Sales Disappoint - Could It Be 'Cliff Concerns?'
Real Estate: Rising Home Prices
Why Congress Might Abandon the Debt Ceiling
--Written by Diana Olick at CNBC
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV