The 3 Most Important Factors Driving Home Prices

housing construction

Photo: Joe Raedle/Getty Images

Some argue that the U.S. housing market has bottomed already, and recent housing data suggests that national home prices are in the early stages of recovery.But housing is local, and price growth changes depend on the market.

We drew on a new housing market report by Beata Caranci, Deputy Chief Economist at TD Bank Group who identified the three most important factors affecting home prices.

1. There is a strong connection between the pace of job growth and rising home prices

North Dakota, Oklahoma, Utah, Texas and West Virginia are among the top 10 states that have seen home price growth over the past year and, also rank among the top 10 states for job growth.

This connection is seen even at the macro levels with cities like Dallas and Phoenix seeing strong price and employment gains, while the opposite is true in cities like Las Vegas and Chicago.

This also explains why we haven't seen improved housing affordability in some of the hardest hit states like California where prices are 47 per cent off their peak translate into stronger housing demand.

Source: TD Bank Group

2. States that have attracted foreign interest have seen home prices increase more than states that haven't

International buyers accounted for only 8 per cent of all home transactions in 2011, but foreign purchase activity is highly concentrated in key markets. '58% of foreign related purchases were in Florida, California, Arizona, and Texas. In fact, Florida alone accounted for 38% of the foreign purchases.'

Moreover, foreign demand is important right now because the credit conditions in the domestic market are constrained, and foreign purchasers pay 100 per cent of their purchase in cash.

Vacation spots like Florida and Arizona have a larger portion of their market driven by foreign demand. Canadians account for the largest source of foreign demand, especially in markets like Florida. There are concerns that the slowdown in Canada's housing market could translate into fewer purchases in the U.S.. And that a slowdown in Europe and China could also hurt foreign demand.

Source: TD Bank Group

3. Supply of homes including foreclosures also heavily impact home prices

The number of existing home sales have fallen significantly in the last year. The number of vacant homes for sale dropped across all four census regions show that inventories are tightening across the country.

But this is only part of the story. Delinquent and foreclosed homes also need to be considered and Florida is ground zero for this, since 14.3 per cent of ts mortgages are in foreclosure. But just because home prices have appreciated 4.7 per cent over the past year doesn't mean Florida homes have defied supply and demand principles in economics.

'What drives prices is not the absolute amount of foreclosures backlogged in a court system or review process. Rather, it is the rate at which they trickle onto the market and, thus, their share of total sales.'

Source: TD Bank Group

Now here's a complete overview of the U.S. housing market...

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