We are happy to cover all sides of the bubble beat. This is the second release this month from our perma-bear, Mark Hanson. He has been saying the same thing for 3-4 years, and it’s all based on theory and previous history. Around here, our market is almost completely driven by owner-occupiers who are buying homes for the long-term:
If 2006 was a known bubble with housing prices at “X”, affordability never better, easy availability of credit, unemployment in the 4%’s, total workforce at record highs, and growing wages, then what do you call today with house prices at X+ 5% to 20%, worse affordability and credit, higher unemployment, weakening total workforce, and shrinking wages? Whatever you call it, it’s a greater thing than “X”.
So too has CNBC’s John Carney, in a post from late last year with the headline: Yep, it’s another housing bubble. And then on January 14 of this year, Peter Wallison at the American Enterprise Institute wrote a breathless op-ed proclaiming: The bubble is back.
But is it really a bubble just because home prices are rising again?
Nick at the Wall Street Journal has been doing a great job covering the real estate market lately. He likes to stir it up on Twitter, and yesterday he got a few experts to chime in about pricing in 2014:
There is always a lot of banter and hyperbole, but pricing is somewhat predictable. Sales are the leading indicator – and when sales start lagging, typically prices will follow shortly thereafter.
Here are the quarterly NSDCC sales counts for the last three years. While it looks like there was a big drop-off last quarter, the sales in 4Q13 were actually higher than they were in 4Q11, when rates were comparable and pricing was 32% lower – so no panic yet:
I think we will see the same ingredients in early 2014 that led me to believe we’d have little or no appreciation. What changed was the how I think sellers will react to it.
They will likely tack on the usual 5% to 10% (or more) onto the recent comps, and tell their agent that they aren’t in a hurry, and don’t have to sell. Buyers will hesitate, and the only homes that will be selling are the best-quality buys.
But instead of lowering their price to help cause a sale, the remaining sellers will wait or cancel, chalking it up to the ‘changing market’, and not to their unwillingness to sell for what the market will bear.
So while it might appear that pricing is on the rise, it will be on thin trading. Once it becomes obvious that sales are falling – after being compared to strong counts from the frenzy – then we’ll see if the usual market fundamentals cause prices to follow.
They may not – after all, it is the new normal now. We could see sellers put their home on the market every spring until they get what they want – the ultimate ‘Make Me Move’ market.
Bubbleinfo on Twitter, where you’ll find links to additional articles by others, with the first line authored by me as a tee-up. Each new bubbleinfo tweet is posted in the right column here on the blog (and if you access via a mobile device, underneath the posts):
A panel of esteemed housing experts speaking at the ABS East 2013 conference underway in Miami disagreed on Robert Shiller’s recent call that U.S. housing is in a bubble.
Moderator Howard Esaki, managing director at Standard & Poor’s, who himself puts out regular morning emails encapsulating finance news, played a video on Bloomberg of Shiller talking of a housing bubble.
Shiller co-developed the S&P/Case-Shiller Composite-10 Home Price Index and actually said housing was looking bubbly. His words were later moderated in a column in the New York Times.
The panel elaborated on whether or not U.S. housing is actually in a bubble. No one believes it is.
Mark Fleming, chief economist of CoreLogic, said price appreciation is slowing down, and is only correcting for an overshoot in price collapse. He didn’t think it would return to the inflated pricing before the housing bust.
“We are certainly not in a housing bubble,” said Laurie Goodman who heads up a housing thinktank at the Urban Institute. Both Goodman and Fleming said housing could absorb higher interest rates and remain attractive. Goodman posited that even with a 6% interest rate, affordability would remain at 2000-2003 levels, which were pretty stable compared to 2006-2007.
“I don’t see interest rates going to 6% any time soon,” she added.
Esaki then addressed the crowd at ABS East, where attendance is at a record high (3,500+) with an estimated 1,000 investors, according to data released by organizer Information Management Network.
Esaki asked for a show of hands: “Do you think there is a housing bubble?”
Not a single hand went up.
Later an audience member pointed out that “no one raised their hand, so maybe we are.” The devil’s advocate then sat back down and the panel moved on to talk about the slim chance of near-term GSE reform.
The folks at www.1worldonline.com like to poll their audience, and last month they used a bubbleinfo.com blog post in one of their surveys. Their readers voted on this question:
Is the increase in real estate value a sustainable trend? Home prices have increased substantially in the last year compared to the previous seven years. Is the increase a sustainable trend, or just a miniature housing bubble?
Chris says 55% of respondents believed another crash was going to come, with more Republicans strongly believing in a crash.
Those who voted for another crash may have been influenced by the opposing blog post to mine, which talked about the millenials facing a weak job market, and shrunken workforce in general.
This was his summary paragraph:
With investors fleeing the real estate market because of higher interest rates, with fewer people working and those that are working are earning and saving less, who is going to be able to buy houses in sufficient volumes to keep the real estate “recovery” going? It doesn’t matter how low interest rates are if people don’t have the incomes, savings or credit to buy homes. Rising interest rates can only make a bad situation worse.
My rebuttal, which, like my blog post, pertains to our local market:
Investors fleeing? Supply evidence please, or is that just a guess? I still get emailed every day by investment groups wanting me to send them deals. If there are fewer investors buying, it’s because there are fewer deals, which would mean prices are holding up or going higher – too high to make sense for flippers. Investors are supplying the floor to the market.
Unemployment has been terrible, with little or no improvement in the last few years – yet our real estate prices have gone up 20%. Apparently, the local real estate market is NOT influenced by unemployment.
Savings or credit? You can obtain an FHA loan up to $697,250 with 3.5% down payment and a FICO score as low as 580. PacTrust Bank will give you a 30-year fixed rate around 5% even if you have had a short sale in the last year. Most anyone can get a mortgage if they want it bad enough.
Even if it’s not as bad as he says, we keep hearing how ‘demand has been pulled forward’. If so, it’s a good question – who will be the future buyers?
The future buyers will be the first-timers and others who want to finance their purchase, especially with a lower down payment, who have been shut out by the big-money investors and cash buyers in general. This future-buyer pool will likely have a limit on their resources, so the appreciation trend will probably moderate, and prices will fluctuate from area to area.
But with a county population of 3.14 million people, we don’t need everyone in the pool – we only sold 3,466 homes in the county last month. You could exclude 90% of the population from the market and we’d still have enough demand…at least until the baby-boomer liquidation sale starts around 2020.
The perception of affordability, combined with the fact that home prices compared with rental rates are at levels last seen in the early 2000s, is making it tempting for people to think now’s a good time to buy a home.
“We are currently in a carnival funhouse mirror,” says Stan Humphries, chief economist at Zillow. ”Homes seem quite affordable when at base they are not.”
Humphries says there’s a lot that worries him. The main tool the Federal Reserve uses to fix the broader economy—lowering rates—”could, if it hasn’t already, reinflate a bubble in the housing sector.” If incomes start to grow more, home values could move more into line with historic norms, but that’s not likely.
More likely, in his view, is that as rates rise and push mortgage payments higher, people are going to realize that homes—and not just mortgage payments—are overpriced for what the nation as a whole earns, which in turn could send home prices tumbling again.
Humphries’s outlook is unsettling. He says many people think that once home prices corrected from their overinflated bubble levels, the market would be back to normal. But that’s not the reality he sees. “It’s really a period of oscillations that will be disorienting for buyers and sellers, and I think we are far from done.”
Remember the days when residential real estate gained equity each year? It’s happening again in California, and a year from now homeowners could see as much as a 20 percent increase in the median price of homes across the state, according to Bruce Norris, a Riverside-based real estate analyst and principal of The Norris Group.
“My best guess is that California we will have significant price inflation. Prices could escalate so strongly that we will think we are in 2004 instead of 2013.”
Some may ask how this is possible. But Norris has experience predicting the unpredictable.
A real estate consultant, investor and educator for the past 30 years, Norris publicly predicted the current sub-prime lending and foreclosure crisis in January of 2006, more than a year before the nation’s leading economists and real estate industry analysts would even acknowledge the possibility of a downturn. Norris also correctly forecast both the real estate boom that began in 1997 and the subsequent doubling of home prices.
Norris now says he has identified three reasons why median home prices in California will go up.
For starters, he said, policy decisions have resulted in record low inventory levels.
“In many areas,” Norris said, “there’s one month of inventory. Inside of that one month of inventory are very few REOs and a lot of short sales that may or may not really be available to buy and close anytime soon. The properties that would normally be purchased by owner occupants are being snapped up by billion dollar hedge funds. These hedge funds, unlike the smaller investor types, are keeping all of the properties as rentals. There’s a little inventory for sale by ‘normal sellers with equity,’ but, right on cue they are getting the idea their property just might be worth more than the last sale.”
With the absence of inventory, Norris predicts, prices will escalate.
A second factor paving the way for the rise in median home prices in California is the return of the former homeowner who was foreclosed on in 2008 and 2009.
“The numbers of trustee sales in those years were staggering,” Norris said, adding, “As a percentage of whatever had happened in the past, 2008 and 2009 will go down in history as the California Real Estate Collapse of all time. The numbers differ across the state but the percentages are similar. In San Bernardino, the numbers of foreclosures exceeded the number of sales in 2008 and 2009. Fast forward to 2012 and you now have those same people ready and capable of buying a home again.”
So, how is it these people can buy homes so soon after going through a foreclosure? The answer, Norris says, resides with FHA, which will now make a loan to a buyer who lost their home via foreclosure after three years. “Buyers have realized that their house payment would be less than their rent, and that’s fueling demand and pushing up home prices,” he said.
The third factor setting the stage for a significant increase in median home prices is interest rates. “Interest rates are at all-time lows, and that allows for price increases to take place without significantly increasing mortgage payments,” Norris said, adding that he expects California’s median prices to up by as much as 20 percent during the coming year.
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