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Are Charlotte’s home prices rising too fast?

Rows of houses line Park South Station in south Charlotte last week. In January Charlotte home prices were up 3 percent from 2014. By April the year-over-year increase had surged to 8.6 percent, Charlotte Regional Realtor Association figures show.
Rows of houses line Park South Station in south Charlotte last week. In January Charlotte home prices were up 3 percent from 2014. By April the year-over-year increase had surged to 8.6 percent, Charlotte Regional Realtor Association figures show. tsumlin@charlotteobserver.com

Home prices in Charlotte and elsewhere are rising at a rapid clip as the housing market continues to recover from the last downturn.

But are prices climbing too fast?

The answer depends on the city. A report out this month says some markets, such as Miami and Washington, D.C., may be experiencing inflated prices like those that preceded the U.S. housing meltdown.

No one is saying Charlotte is in bubble territory. But real estate observers are keeping a close eye on the steady pace of price increases.

Pat Riley, president of Charlotte-based real estate firm Allen Tate Cos., said home prices in some local neighborhoods continue to appreciate more than he expected. He thought appreciation in Charlotte would be around 4 percent this year. But in some highly desirable areas, prices are increasing as much as 8 percent, he said.

Tight supplies of homes for sale are largely to blame.

“We’re not a bubble place, in any way, respect or form,” Riley said. “But with a lack of supply, appreciation is going to be greater than anyone anticipated.”

Others say Charlotte could get into trouble if the rate of price increases doesn’t taper.

Figures from the Charlotte Regional Realtor Association underscore the accelerating pace of the increases. In January, home prices in Charlotte were up 3 percent from the year before. By April, the year-over-year increase had surged to 8.6 percent. The association said this month that the steady price gains are raising concerns about future affordability.

Appreciation in Charlotte is rising “at a very high clip,” said Hogan Copeland, chairman of Smithfield & Wainwright, a Florida-based real-estate valuation firm.

This month, Copeland’s firm released data showing at least 14 states and the District of Columbia are posting sharp spikes in prices that could indicate overheating. The 14 are in what Copeland calls the firm’s “early warning system” for overvaluation.

North Carolina and Charlotte currently do not qualify for the label. But if prices continue to increase at their current rate in Charlotte, that might change, Copeland said.

“Within three or four quarters, you’re going to have an issue,” he said.

Competition drives prices

Even as home sales nationwide remain sluggish, prices are rising in much of the country as competition for tight supplies of homes heats up.

“It’s getting pricier,” said Robert Shiller, the Yale University economist who created the Case/Shiller Home Price Index.

While nowhere near the boom that preceded the bust in 2008, the price increases seem incongruent, Shiller suggested.

“We do see nationwide an increase in home prices and I don’t know if things are better. This boom has negative color to it,” said Shiller, expressing concern that bidding wars often reflect a lack of available housing in the most-desirable neighborhoods.

The price trend is making housing less affordable for many Americans, who saw wages grow by just 2.6 percent since April 2014. The midpoint price for a home in the U.S. rose by almost 8 percent between March 2014 and March 2015.

In Charlotte, low – and falling – supplies of homes for sale are driving up prices as new residents continue to flock to the region. Just this week, the U.S. Census Bureau said population growth between 2010 and last year made Charlotte the nation’s third-fastest growing city.

Riley, of Allen Tate, says a lack of developed land for new-home construction is one factor in the low supplies. Another is too few people putting their homes up for sale, said Suzanne Coddington, an agent with Charlotte-based real estate company Dickens Mitchener.

“It’s not that they don’t want to buy,” she said. “It’s that if they sell their house, where are we going? That’s really the quandary right now.”

Where do prices go now?

Historically, home prices nationwide have averaged 3-4 percent growth annually with little risk for owners. In the mid-1990s, home prices began soaring past 13 percent annual growth, before collapsing in 2008.

Smithfield & Wainwright compared home sales price data from the Federal Housing Finance Administration to the cost of renting a home or replacing one in areas across the country. When the sales price exceeds by 10 percent either the cost of renting or replacing a home, the firm argues, it signals a potential price bubble that could burst.

“The banks are exposed and the homeowners are exposed because they both have a false feeling that the house is worth that amount of money. And that’s false equity,” warned Copeland, the company’s chairman. The equity they think they’ve built up in their home may prove ephemeral.

The data should be viewed as an “early warning system,” said Copeland, since it implies that lenders and government-controlled mortgage titans Fannie Mae and Freddie Mac might be at elevated risk for losses if homes are selling for more than they are really worth.

Copeland said nationwide sales prices on average are 3 percent over renting and replacement costs. In North Carolina, sales prices are about 9 percent below renting and replacement costs. In Charlotte, they’re about 7 percent below. That’s because home prices in this region remain below pre-recession peaks, according to Copeland’s data.

In a healthy market, Copeland said, sales prices of homes are about 1 to 10 percent above what it costs to rent in that market or replace a home.

What the firm’s data means for Charlotte, he said, is that a person selling their home here might end up paying much more to build a comparable-sized home. Even so, he said, the rapid pace of home prices increases here bears watching.

David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, said he was skeptical about whether Smithfield & Wainwright’s 10 percent threshold is a precise indicator of a bubble forming.

Blitzer said home prices have been rising nationally at about 4.5 percent for at least six months. In a handful of cities, such as Miami and San Diego, prices are rising at a fast, unsustainable rate, he said. But that’s not widespread.

“I don’t see this picture, this idea, that we’re about to enter another housing bubble and we’re setting ourselves up for another crisis and that kind of thing.”

Wealthy reaping gains

A McClatchy analysis of sales data provided by the National Association of Realtors shows that wealthier Americans, who presumably have more access to credit or the ability to pay cash, are reaping most of the gains from rising prices and increasing home sales.

From 2010 to 2015, sales of homes valued above $1 million rose by 21.06 percent, and homes valued between $500,000 and $750,000 rose 14 percent over the same period, McClatchy found.

At the bottom of the price ladder, sales of homes valued between $100,000 to $250,000 – middle-class homes – rose by just 4.5 percent over the six-year period. Sales of homes valued at under $100,000 actually fell by 3.38 percent from March 2010 through March 2015.

Riley, of Allen Tate, said areas across Charlotte with the highest-performing schools are posting some of the biggest home-price gains thanks to high demand.

“Wherever the good school report cards are, you’re seeing the greatest demand.” Kevin G. Hall of the McClatchy Washington Bureau contributed.

Roberts: 704-358-5248;

Twitter: @DeonERoberts

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