Why buying a house will cost even more than you think

The hot U.S. housing market shows no signs of cooling off and Jeff Taylor, Mphasis Digital Risk co-founder and managing partner, said buyers should think carefully before shelling out big bucks for a house.

"There's definitely, I think, a difference in between what something is worth and what somebody is willing to pay," he told Yahoo Finance Live.

Read more: Buying a house: What you need to know about home ownership

In some cases Taylor said people are paying too much. "I definitely caution people looking to jump into the housing market right now, especially the millennials who are either living at home or renting, to be thoughtful about it." Taylor cautioned.

Mphasis helps lenders assess a mortgage borrowers' risk. The company's technology touches every stage "of the mortgage life cycle," according to the company's webpage. The due diligence services they provide to clients also give Taylor and his team a view of the housing market few see.

Taylor won't call it a bubble, but says buyers are willing to pay more than some houses are worth,"The loan products that are out there today are very solid since the financial crisis. So the borrowers are in these homes, can afford these homes and have been making payments," he said.

Morgan Stanley strategist Vishwanath Tirupattur recently wrote in a note to clients, "US housing is on a hot streak. Home prices as measured by the S&P Case-Shiller Index rose 12.2% year-over-year, with prices surging across all 20 of the metropolitan areas tracked by the Index. That amounts to an increase of $35,000 in the median selling price for homes from just a year ago and marks the fastest pace of increase since 2006."

'Lumber prices are up 340%'

Home price growth in the U.S. surged at the fastest pace in 15 years early this year. Contributing to the increase is a shortage of existing and new homes for sale. The National Association of Home Builders (NAHB) last week confirmed skyrocketing lumber prices were driving up prices for new homes.

"Lumber prices are up 340% in one year," Taylor said. "Three months ago, the lumber, the rising lumber prices added $24,000 to a new house. Today, three months later it is 36,000."

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And Taylor said it's causing a ripple effect across the housing market in states like Texas and Florida.

"We have seen bidding wars at every price point but especially at the high end, as you see people coming in from Boston, Chicago, New York, everywhere trying to escape sort of the you know, the cold weather and what's perceived to be rising tax rates," Taylor said.

Morgan Stanley's Vishwanath Tirupattur said younger Americans forming new families are also driving prices up. "Thanks to the demographic dividend, millennials continue to drive household formation at a rate 30-50% above the long-run rate of new household formation. Thus, demand for shelter is likely to remain robust for some time to come," he said.

The current supply demand imbalance is one of the reasons Taylor advises potential buyers to ask themselves, "Is what I'm paying a good investment over the long run, or is it maybe 10%,15% higher than what it was a year ago?"

He expects rising interest rates may slow the pace of rising prices but agrees with Morgan Stanley's conclusion about where prices are headed. "Their upward trajectory remains on course," Tirupattur wrote.

Adam Shapiro is co-anchor of Yahoo Finance Live 3pm to 5pm. Follow him on Twitter @Ajshaps

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