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Record High New-Home Prices Have Room to Grow

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Despite moderate moves higher in home sales, home prices are on a tear.

The median price of a newly built home soared to $271,600, the highest level on record dating back to 1963, according to a new report from the U.S. Census. Prices are now 15 percent higher than they were a year ago for new construction and around 10 percent higher for existing homes.

"We've gone through a very long downturn and prices overcorrected. The first move is we're seeing a kickback or reversion to normal," said Stuart Miller, CEO of Lennar Homes, one of the nation's largest homebuilders. "It feels like prices are on the move, but they're just snapping back to pricing levels they should have been at."

(Read More: Map: Tracking the US Real Estate Recovery)

Tight supply, cheap credit and rising demand are pushing overall home prices higher, but land is the issue in the new-home market. Builders are in fact slowing production to take advantage of pricing power, which is only adding to the still tight supply. It is a form of rationing.

Builders are slowing because they cannot find the next replacement community for the one they're building through now. They don't want to end up with nowhere to build. Luxury homebuilder Toll Brothers reported a 16 percent jump in the average price of net signed contracts in its second quarter year-over-year.

(Read More: Why the Housing Market Won't Drive the Recovery)

"One year ago, we were somewhat reluctant to raise home prices for fear of crimping demand," said Toll Brothers' CEO Douglas Yearley Jr. in a release. "Now we are finding that in many markets as prices increase, a sense of urgency takes hold and demand continues to rise. We have raised prices this quarter approximately $26,000 per home on average."

The concern now is that home prices are rising too fast—faster than incomes and job growth. Realtors worry that, at some point, buyers will be priced out.

"These price increases are not healthy," said Lawrence Yun, chief economist for the National Association of Realtors. "We need to moderate price growth and get more supply."

But Lennar's Miller disagrees:

"I think if you look at affordability right now, with interest rates where they are, and even if they go up a bit, we're in a very comfortable place. There's a lot of room for prices to continue to move up."

Supplies of new and existing homes are at levels not seen since the frenzy of the last housing boom. The phenomenon is national and not just relegated to the former boom markets. April listings were down 41 percent from a year ago in Los Angeles, down 24 percent in Houston, down 27 percent in Washington, DC and down 29 percent in Minneapolis. While the stock of newly built homes on the market rose to an 18-month high, builders are still facing land and labor shortages, which will keep starts lower than they could or should be based on demand.


(Read More: Homes Selling at Fastest Pace Since Boom)

"It has the look of a runaway housing boom again," said Jane Fairweather, a Realtor in Maryland, who added that looks can be deceiving. "What you have is very inexpensive money and you have very few houses for sale. As soon as interest rates go up, I think you'll see a lot of people back off."

Interest rates have been moving steadily higher. After Wednesday's speech by Federal Reserve Chairman Ben Bernanke, rates took another jump of 0.375 percentage points.

"It's an over-correction, but a painful one for buyers," said Dan Green of Waterstone Mortgage. "A home buyer has five percent less home purchasing power as compared to 24 hours ago.

In the end, sales will come down to buyer confidence, affordability and mortgage rates. Even if that last one moves higher, rates are still historically low and confidence is gaining steam despite the rising prices.

"This week I had a seller who got a full price offer in about four days and he refused to take it because he wanted multiple contracts, come on!" exclaimed Fairweather.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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