Higher prices 'choke' housing

It may seem counterintuitive, but fast-rising home values are the biggest negative in today's housing recovery. After an epic plunge in prices following the financial crisis, the thought was that rising home prices were a sign that all would be well again soon. Now, two new reports point to weakened affordability as the primary barrier to more robust home sales.

Sales of existing homes across the nation barely moved from February to March, with analysts still blaming rough winter weather for the 7.5 percent drop in the numbers from a year ago. A closer look regionally, however, offers a more telling story.

Home sales rose over 9 percent month to month in the Northeast and 4 percent in the Midwest, according to the National Association of Realtors. That is not a bounce from a warmer March because these numbers represent closings of sales contracts signed in January and February, when the weather was at its worst in those regions.

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Sales of homes dropped in the South and West, where home prices have jumped higher and faster.

Consider that prices are up just 3.2 percent year over year in the Northeast but are up over 12 percent in the West and nearly 7 percent in the South, according to the Realtors.

During the foreclosure crisis, all-cash investors targeted hard-hit markets in the West and South, driving prices higher by double digits. Now investors, who really priced themselves out of the trade, are moving east, leaving their former favorite hot spots to regular, credit-dependent buyers. Those buyers are not keeping pace because inventories are so low and prices now so high.

"Affordability has had a big impact," said Lawrence Yun, chief economist for the National Association of Realtors. Yun points to the fact that sales of lower-end homes, priced below $100,000, are down the most, off 18 percent from a year ago, due to far fewer distressed homes. The foreclosure rate is now at its lowest in six years and newly started foreclosures are at a 7½-year low, according to a new report from Black Knight Financial Services.

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But even in what Yun called the "sweet spot," or homes priced between $100,000 and $250,000, sales are down 10 percent. That, again, points to weakened affordability. Only $1 million-plus homes, where potential buyers are the wealthiest Americans, are seeing sales gains; that cohort is just 2 percent of the overall housing market.

The rise in home prices, occurring in the absence of comparable rises in employment and wages, is staggering. The losses from the recession have already been, or are close to being, erased in nearly 20 percent of metro housing markets studied by Zillow. Researchers there say prices in more than 1,000 U.S. cities could be more expensive than ever within the next year.

Home values in 60 of the 300 major metropolitan markets surveyed by Zillow have already exceeded or are expected to exceed their prerecession peaks in the next year, including in Dallas, Houston, Denver, Pittsburgh, San Antonio, San Jose, Calif., and Austin, Texas. Nationally, however, prices are still 13.5 percent below their 2007 peak. Still, many major markets in California are already considered unaffordable, with people paying a greater share of their monthly incomes on mortgage payments than historical norms.

"The lows of the housing recession are becoming an increasingly distant memory as home values reach new highs and homes become more expensive than ever in many areas. This is a remarkable milestone coming only 2½ years after the end of the worst housing recession since the Great Depression," said Zillow Chief Economist Stan Humphries. "But there are a handful of markets where affordability is again a challenge. Mortgage interest rates won't stay low forever. And rents have also been marching steadily higher for several years. As a result, the housing affordability issues we're already seeing in select markets could become a much more widespread concern a few years from now."

The Realtors point to lack of inventory for sale as the biggest problem, driving prices too high, too fast as demand returns. Current homeowners are concerned about listing their properties, fearing they won't find anything to move up to. Meanwhile housing starts have trended lower in the first part of this year and are still below 1 million annualized (1.7 million is considered a normal, healthy home construction market).

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Yun points to a lack of labor plaguing the builders and even suggested that "tight border conditions" now are keeping many of the illegal workers who fueled the housing boom and then left, from returning to the workforce.

"It's a huge choke point," Yun said of the lack of construction.

Supplies of homes for sale did rise slightly in March from a year ago, and some communities are seeing "Coming Soon," signs on more properties. A real estate agent in Bethesda, Md., however, who usually does open houses on Tuesdays, said she would not do one this week. She sold all of her listings last weekend.

—By CNBC's Diana Olick.