3 Reasons The Housing Market Recovery May Not Last

by 18 Apr 2013

(CNNMoney) --The housing market has made a big comeback over the past year; home prices have surged some 8% and homebuyers can't seem to buy up properties fast enough.

But just as quickly as the market is gaining ground, some industry experts worry it will come crashing back to Earth. Here are three reasons the housing market recovery may not last:

1. The housing recovery is being led by investors. One problem is that investors are leading the latest surge in home prices, said Dean Baker, co-director of the Center for Economic and Policy Research. They are taking advantage of low interest rates and depressed home prices and when those rates and prices rise, they'll likely pull back, he said.

"An investor-driven boom is likely to end badly," said Baker. "I'm worried that some of the big jumps in prices are driven by the same sort of speculation that drove the [original] housing bubble."

And while institutional investors and small but experienced mom-and-pop outfits have been buying many of the properties, there are a growing number of inexperienced "armchair investors" now buying into the boom -- a sign that demand may be peaking, Baker said.

In some hot markets, home prices should start slowing or even reverse gains. In Phoenix, where selling prices were up 23% year-over-year in January, many investors planned to rent out the properties they bought. "Yet, there was no comparable increase in rents and the rental vacancy rate in Phoenix is very high," said Baker

As investors realize a low rate of return on their investments, demand will soften, he said.

2. The economic recovery is just not strong enough yet. "These days, I worry more about the economy hurting housing than housing hurting the economy," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a Washington D.C.-based think tank.

He's especially concerned about employment. Hiring slowed significantly in March, with just 88,000 jobs added -- the weakest showing since last June.

Meanwhile, half a million Americans withdrew from the workforce during the month; either because they stopped looking for work or retired and stopped drawing unemployment. Many were discouraged workers, a sign that the economy remains weakened.