Has the Housing Market Recovered Too Quickly?

The U.S. stock market has rallied tremendously since mid-November, as investors have grown more bullish on the economy. Many are accrediting the housing recovery for the recent bull run, as home prices have soared double digits year-over-year in many areas nationwide.

But has housing appreciated too quickly to secure a sustainable, long-term recovery?

Spencer Rascoff, the CEO of online real estate market place Zillow (Z), certainly believes so. In an interview with CNBC, he said that rising mortgage rates could derail the housing recovery in the long run.

“Imagine yourself buying a $300,000 home today, and in four years you may want to trade up to a $500,000 home. That home is not just that much more expeisnive – but because mortgage rates are going to be higher – it’s significantly more expensive,” Rascoff said. If mortgage rates go up with continued strength in housing or impending decisions from the Federal Reserve, the vital “trade-up” market could get extremely ugly a couple years down the road.

In the short-term, however, Rascoff believes that housing may continue to rise. “So very little supply and significant demand. That’s driving price spikes.”

These “spike prices” are evident throughout the country. The following numbers represent the strongest housing returns over the previous 12 months, according to Zillow’s website.

• Phoenix Metro: 25.5 percent
• Sacramento Metro: 25.4 percent
• San Jose Metro: 25.2 percent
• San Francisco Metro: 24.8 percent
• Modesto Metro: 24.1 percent
• Vallejo Metro: 23.4 percent
• Las Vegas Metro: 23.0 percent
• Reno Metro: 21.6 percent
• Stockton Metro: 21.3 percent
• Santa Rosa Metro: 20.4 percent

With such phenomenal returns in many areas, Rascoff believes now is a good time to sell and trade up while mortgage rates are still low. The average rate for 30-year, fixed rate mortgages reached 4 percent this month, but Rascoff believes these rates will inevitably reach 5 or 6 percent.

Investors fear that these higher mortgage rates could derail the housing recovery, and with unemployment still at 7.5 percent, the economy remains somewhat vulnerable. This has prompted some investors to pull out of the stock market, which explains the recent 3.5 percent correction and high market volatility.