Hot markets boil and bubble

Increased competition for the limited inventory of non-distressed property listings helped push the average home sales-to-listing price ratio to 95.6 percent in June, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.

This was the first time in nearly three years this important ratio has been this high. But the HousingPulse monthly survey also found that much of June’s growth in sales-to-list price ratios was driven by brisk home purchase activity in three states - California, Arizona and Nevada.

“Strong demand, particularly in areas of California, Arizona and Nevada, are pushing up home prices very quickly in the short-term. And because many of the home purchases in these areas are cash transactions, there appears to be less braking of prices by our current appraisal system than seen in other parts of the country,” noted Thomas Popik, research director for Campbell Surveys and chief analyst for HousingPulse.

“This trend raises the distinct possibility of housing price bubbles emerging in some of these hot housing markets,” he added.

While a rise in sales-to-price ratios was one of the most visible signs of improvement in the non-distressed property sector of the housing market, the average time on market and the average sales price for non-distressed properties also registered strong improvements. In fact, closed sales prices for non-distressed properties would have increased more if it were not for tough appraisal standards placing restraints on mortgage-financed property prices.

HousingPulse results showed time on market for non-distressed listings fell sharply in June to 11.7 weeks, a drop of a full week from the May reading of 12.7 weeks. As recently as March, the non-distressed property time on market had been 14.0 weeks. The June 2012 time on market for non-distressed listings is the lowest in over two years and substantially below the June 2011 reading of 15.0 weeks.

Metrics for non-distressed properties are some of the best indications of housing market conditions, because month-to-month policy decisions of mortgage servicers on REO (real estate-owned) and short sale disposition do not bias these statistics.

The average sales price for non-distressed properties rose from $257,200 in May to $260,900 in June, an increase of 1.4 percent in only one month. Numerous real estate agents responding to the HousingPulse survey indicated that prices would be increasing more rapidly, except that appraisal standards require comparables from distressed properties.

Additionally, comparables that are several months old do not match recent market values, hampering mortgage-financed buyers from placing winning bids in multiple offer situations and instead giving properties to more frugal cash-only purchasers.

In markets with a high proportion of cash sales, property prices are increasing more rapidly. Markets with a high proportion of cash sales and strong price appreciation include California and Arizona/Nevada. HousingPulse results indicated that sales-to-list price ratios in the western regions of California and Arizona/Nevada exceeded all other areas of the United States by wide margins.

The Campbell/Inside Mortgage Finance HousingPulse Tracking Survey involves approximately 2,500 real estate agents nationwide each month and provides up-to-date intelligence on home sales and mortgage usage patterns.