Home Prices Could Surge 35 Percent Without Causing Home Affordability to Drop

A big drop in home prices the past six years combined with record low mortgage rates will cause housing prices to surge, according to Raj Dosaj, vice president of the behavioral library and home price index at LPS Applied Analytics. Raj Dosaj made this bold statement in a webinar hosted by HousingWire. He went on to say the increase in home prices won't be as big if current mortgage rates move higher, which analysts expect to happen.

Home affordability was at a record high in 2012 and homes remain more affordable then ever. The National Association of Realtors' Housing Affordability Index stood at a record high of 198.2 in November 2013. The recovery in home prices has already started the past year, so Raj Dosaj's prediction is quite bold. The NAR's January Existing-Home Sales Index showed the median home price up 12.3 from January 2012.

In the hardest hit areas of the county, home prices have fallen by more than 50 percent from the top of the housing boom. Also during this time, mortgage rates have been driven to record lows due to the Federal Reserve's actions to drive rates lower. Mortgage rates today on 30 year conforming loans are averaging 3.55 percent but you can find lenders quoting mortgage rates well below the average.

Housing affordability is high and mortgage rates are low but unfortunately, millions of potential homeowners can't take advantage of this because lending restrictions are tighter than ever. During the housing boom, lenders allowed for up to 100 percent financing with lending restrictions being relaxed to the point of a buyer not being required to produce any documentation on their financial status or income to buy a home.

Since the bust, lenders are now requiring a 20 percent down payment, higher credit scores, and more stringent underwriting restrictions, which have put the option of buying a home out of reach for millions of people. Fortunately, both the Federal Housing Finance Agency and the Federal Housing Administration are working on steps to persuade lenders to issue more loans.

Another factor that will contribute to higher home prices is the unemployment rate. As long as the unemployment rate remains high and there is fear of losing a job, potential home buyers will hold back on purchasing. Once the economy improves dramatically and the unemployment rate falls, home prices will move higher.