Home prices continued to speed upward in March, posting their biggest year-over-year gain since April 2006, according to a widely-followed index.
Property values shot up almost 11 percent in March over the past year according to the S&P/Case-Shiller home price index released Tuesday. March's gain comes on top of a more than 9 percent gain in February, sparking fears that some U.S. housing markets might be overheating.
Las Vegas, Phoenix, and San Francisco all posted appreciation rates of more than 20 percent. Even the smallest gains -- 2.6 percent in New York, 4.8 percent in Cleveland and 6.7 percent in Boston -- were characterized as "quite substantial" in the report.
"Housing prices are rising very fast and they're disconnected from the economic reality," says Anthony Sanders, a senior scholar at George Mason University's Mercatus Center and a former Deutsche Bank economist. "There's a natural rebound effect after an incredible bust, but the Federal Reserve's zero interest rate policy might be setting the stage for a big bubble."
Here's why, according to Sanders. Mortgage purchase applications by consumers have been flat since 2010 and if people aren't applying for mortgages to buy houses, where is the demand that's been putting such strong upward pressure on home prices? A lot of it has to do with the extremely low inventory of homes on the market. If there's one home on the market and dozens of potential buyers going after it, prices are bound to skyrocket, he says.
"Is this indicative of a big overall economic recovery? No," Sanders says. "We're in a low-inventory, highly [Fed-influenced] recovery."
Other housing data reported in recent weeks suggests the trend isn't likely to fizzle out anytime soon. While new home construction and building permits have continued to trend higher, construction activity is still much lower than what's needed -- more than a million annual housing starts according to most housing experts -- to help ease tight inventory issues in some U.S. markets. Meanwhile, existing for-sale inventory remains constricted thanks to sellers who have underwater mortgages, further fueling the rapid increase in home prices.
"Low mortgage rates and high negative equity are leading to very high demand and very low inventory, respectively, creating a kind of witch's brew of extreme price spikes," Stan Humphries, chief economist at real estate site Zillow, wrote in an email.
But what some are calling bubble-like price spikes might be much less sinister, Humphries says, especially in places such as Phoenix and Las Vegas, which saw such deep prices declines during the bust.
"Robust appreciation is not an immediate problem [in those areas], which experienced huge price declines and are still very affordable," Humphries says.
The real trouble spots are places in California such as San Francisco where housing affordability is no longer being driven by home prices, but instead by low mortgage rates, a factor in the mix that won't last, according to Humphries.
But apart from a few select markets, Humphries isn't concerned about rapid home price gains. According to him, unless you purchased a distressed property in a large coastal metro area, home prices grew at roughly half the 10-percent pace reported by Case-Shiller.
That's "not bad," according to Humphries, and "certainly confirmation that the housing market is experiencing a brisk recovery."