Fitch analysts: Price increases in some markets not supported by fundamentals

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Artificial constraints on inventory and investor demand for rental properties are driving up home prices in some markets at a potentially unsustainable pace, beyond levels that are supportable by fundamentals like income and employment, analysts with Fitch Ratings warn.

New regulations limiting the pace of foreclosure sales has constrained supply, and many underwater borrowers are still waiting for further price increases that would allow them to sell their homes at a profit, Fitch analysts said in a report released this week.

“The supply-demand imbalance is even more pronounced in regional markets that are seeing strong institutional and retail bids for rental properties,” Fitch analysts said. Low interest rates and steep price declines from bubble-era peaks “coupled with the decline in homeownership have attracted an estimated $8 billion-$10 billion of new capital to this sector. Many markets have a large number of buyers vying for a limited number of homes.”

Fitch analysts believe “this level of housing demand is likely to abate once the pent-up demand is satisfied.” Many of the most worrisome markets are in California, Fitch said. In Los Angeles, prices are up more than 10 percent from a year ago “despite a stubborn unemployment rate that remains above 10 percent and real incomes that have declined over the past two years. Prices are now more than 75 percent above pre-2000 levels.” Source: fitchratings.com.