Home Prices Soar on Short Supply, Investor Demand

Real Estate house for sale
Getty Images

The numbers keep going up. Both new and existing homes are showing the strongest price gains since the housing crash, but distressed properties are playing a lead role in these dramatic moves.

"What we've seen in city after city over the last couple of years is a city will get hit with a wave of foreclosure activity, Atlanta was a case in point, and for two, three, four months the numbers bounce around a lot because you've got a whole lot of new supply coming on the market, and in any market, you dump new supply on you're going to get a price response," said S&P's David Blitzer.

(Read More: Home Prices Log Best Gain Since 2006: Case-Shiller)

Home prices in Atlanta were up 10 percent in December from a year ago, but a year ago they were down 17 percent year-over-year, on the S&P/Case Shiller Index. What changed? Investors. As Atlanta's foreclosure rate soared, investors, no longer finding the big bargains out West, began moving into Atlanta and snatching up distressed properties at a brisk pace.

"Market prices have to go higher to provide incentives for more new houses to be built," said Aaron Edelheit, CEO of Atlanta-based The American Home, a company that invests in distressed properties and turns them into rentals. "I believe we are on the cusp of a massive housing shortage in many parts of the country due to the historic lack of residential investment in the last five years. This summer, I expect the housing market to be 'blue flame' hot."

(Read More: What Tops Home Buyers' Wish List Now)

Prices today are rising fast because supplies of homes for sale are so low. Both new and existing homes are running near four month supplies.

For new homes, builders just aren't able to start fast enough, due to labor and land restraints.

For existing homes, there are fewer distressed properties for sale, a segment that has driven the market into recovery, and organic homeowners are either unwilling to list their homes for fear of selling at the bottom, or unable to list because they are still underwater on their mortgages.

(Read More: Foreclosures Fall Due to New Laws)

"Taking new and existing homes together, the relationship between the months' supply of unsold homes and house prices points to an acceleration in the pace of house prices gains in the year ahead," said Paul Diggle of Capital Economics.

However, there is a growing divergence between prices for regular homes and damaged bank-owned homes, according to a new survey from Campbell/Inside Mortgage Finance.

"Yes, home prices are on the rise for non-distressed properties, which accounted for 65.0 percent of total home purchase transactions tracked by HousingPulse in January," according to the survey. "But no, home prices for REO [Real Estate Owned—or bank owned] properties in need of repair—the type banks look to unload after a foreclosure—have not been rising along with prices for non-distressed properties. They have been moving in the opposite direction."

Prices for damaged foreclosures are at their lowest level in over four years, due to reduced demand by current and first-time home buyers. Investors have increased their purchase share of these properties, accounting for 65.4 percent of sales, up from 58 percent a year ago, according to the survey. Since investors largely buy in bulk, they get bigger discounts.

While home prices continue to surge, they are still 29 percent below their peak in 2006.

Price gains vary widely market-to-market, although the inventory picture is surprisingly similar across the nation, even in markets that did not see huge drops in the housing crash.

(Read More: Taking The Real Estate Recovery Local)

With the all-important spring season knocking on housing's door, price gains will depend on how many more homes are listed for sale. Demand is already waiting.

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

Questions? Comments? RealtyCheck@cnbc.com