2013: How Rising Prices Could Boost Housing Demand

Home prices finally hit a bottom in 2012. So will 2013 be the year of recovery or relapse? This is the second in a series of blog posts about where housing is headed next year.

Potential buyers now have something they haven’t had in a long time: urgency (save for a few months when the government was paying people to buy homes with a first-time home-buyer tax credit). This next year will be the first time since 2006 where prices ended the previous year in positive territory. Surveys already show that buyers’ expectations of future home prices have improved throughout the past year.

Just as falling prices have frozen buyers and sellers in place in recent years, housing strength may be even stronger than current indicators show given the powerful shift in sentiment that price increase may bring.

“Every single thing about housing is flashing green,” said James Dimon, chief executive of J.P. Morgan Chase, in an interview with CNBC last month. Household formation is rising, inventory is falling, and affordability is near a record high.

Homeowner vacancy rates have been dropping and were down to 1.9% this fall, near the long-run average of 1.6% and down from a peak of 3% in 2008, according toGoldman Sachs GS +1.03%. Meanwhile, rising rents are likely to encourage more renters to buy. Finally, low prices and unattractive returns on other assets have fueled enormous investor demand for housing. While investors have begun to pare back in some of the hottest markets, such as Phoenix, they’ve been on a tear in others, such as Chicago and Atlanta.

Rising prices could eventually encourage more sellers to put their homes on the market, which would help boost demand even further. Glenn Kelman, chief executive of Redfin, says he is looking to increase the company’s workforce of 400 agents nationally by 50% by the end of January. “I’m going across the country meeting with managers, and the only topic we’re talking about is hiring,” he said.

Earlier this year, the company ended up sending about half of its referrals to other companies because “demand outstripped the supply of agents,” he said. Redfin is unusual among real-estate companies because it pays a salary and benefits to its agents instead of commissions. “Our model means we have to go long on real estate, and we did not go long enough,” said Mr. Kelman.

By Nick Timiraos

Wall Street Jounal