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Double Bubble?

Are we in a bubble?

Who cares about the label.

All that matters is whether the bubble going to burst.

Four reasons why it won’t:

  1. No easy money – buyers have to be solid qualifiers.
  2. Foreclosures are extinct.
  3. Everyone has loads of equity (except 2021 buyers).
  4. No easy place to move to.

For the bubble to burst, we would need an event to drive down prices. Sellers would have to panic and cheap-sell for less to start a downward cycle. Even an earthquake probably wouldn’t be enough.

Link to Wolf Article

 

When Will the Frenzy End?

Let’s call it the Big Confluence:

  1. Covid concerns keep diminishing over the next few months.
  2. More sellers feel safe to put their home on the market.
  3. More sellers find a way to hurry up and get their home on the market.
  4. Buyer skepticism rises.
  5. Agents get too cocky.
  6. Prices reach their limit.

All the above will cause inventory to increase, and buyers to relax. Then what?

This is my craziest theory of all-time:

‘Not A Bubble’

An excerpt from this article:

https://www.usatoday.com/in-depth/money/2021/02/04/homes-sale-we-housing-bubble-prices-outstrip-wages/6671282002/

For Mark Stapp, a real estate professor at Arizona State University, what’s going on in the real estate market right now is not a bubble.

“The definition of a bubble is that when it pops, there’s nothing there,” Stapp said. “That’s not this case. There’s very real demand that exists and that’s what’s causing prices to increase.”

Realtors across the country generally agree.

Mary Jo Santistevan, a top-producing sales associate with Berkshire Hathaway HomeServices in Phoenix, said buyers are flowing in from congested cities of California, Washington State and the Midwest. They are looking to take advantage of Arizona’s lower home prices, lower property taxes and quality of life. But they are confronting a situation where inventories of unsold homes have been dropping steadily in recent years and are now teetering on a one-month supply in some areas and less than that in others.

“Even builders are struggling to keep up with demand,” Santistevan said. “There’s a 10-month wait time for construction. The majority of builders are using a lottery system. One builder in particular in Gilbert had a waitlist of 100 deep.”

Stacie Lee, a fellow agent at Berkshire Hathaway, says whenever something goes on the market in Phoenix, the showings are usually back-to-back and a closing comes within a matter of days.

“Many homes go for $30,000 to $40,000 over list price and a few homes in the mid $300,000s have sold for $100,000 over list,” Lee said. “A lot are going for cash. Cash is king right now.”

Lee added that she had 70 people show up for an open house over the summer and had 15 offers in the first couple of hours. The home sold for $375,000 and is now back on the market at $550,000.

“There’s a lot of investors flipping homes here,” she said.

Nearly 3,000 miles away in Augusta, Maine, the housing market is just as frothy.

Fifteen of Maine’s 16 counties experienced a 10% increase in median home prices in 2020, according to Aaron Bolster, president of the Maine Association of Realtors. Some of those counties saw leaps of 20% or more.

“We already knew Maine was popular,” Bolster said. “More than 32 million people visit between Memorial Day and Labor Day. They don’t typically come at this time of year. But in a pandemic, it’s a safe place to be. The population density is very low and teleworking suddenly got popular in 2020.”

Bolster said 25% of buyers in 2019 came from out of state. Last year, that number rose to 33%. Without a large housing stock to begin with, available listings got siphoned off pretty quickly as out of state buyers bid up the prices.

At the moment, there are only 6,000 homes for sale in the entire state, Bolster said, and half of them are under contract.

The situation is unique for Maine and Bolster is not sure how long it will last, especially given that the demand is driven by people coming from out of state – many of whom will presumably be able to work from home – and not by job creation within Maine’s borders.

“Maine doesn’t create a lot of new jobs,” Bolster said. “When we create a new job, we give one up. So real estate doesn’t usually appreciate that fast. It’s interesting to see such a robust market when it’s not really tied to economics.”

2019 Wrap-Up & 2020 Forecast

Last December, I had guessed NSDCC sales would drop by 20% this year, but that was back when mortgage rates were touching 5%.  With rates back in the 3s for most of 2019, our sales exceeded my expectations – here are the NSDCC detached-home listings and sales for the first 11 months:

NSDCC Detached-Home Sales, Jan-Nov

Year
Total # of Listings, Jan – Nov
# of Sales, Jan – Nov
Median Sales Price
2016
4,984
2,868
$1,165,000
2017
4,500
2,873
$1,225,000
2018
4,689
2,615
$1,325,000
2019
4,573
2,587
$1,325,000

We’re only 28 sales behind last year, and the late-reporters should pull us up real close to 2018.

This year’s sales AND pricing statistics are virtually identical to last year!

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

There should be more forecasts coming in the next week, but let’s consider what we have so far.

This in today from realtor.com – they have sales dropping in 2020, and prices flat:

Home sales will drop, the housing shortage could become the worst in U.S. history, and home values will shrink in some cities. That’s the 2020 forecast from realtor.com, which holds one of the largest databases of housing statistics available.

Sales of existing homes will fall 1.8% from 2019, according to the forecast. Home prices will flatten nationally, increasing just 0.8% annually, but prices will fall in a quarter of the 100 largest metropolitan markets, including Chicago, Dallas, Las Vegas, Miami, St. Louis, Detroit and San Francisco.

It is a seemingly contrary assessment, given the current strength of the economy and of homebuyer demand, but the dynamics of this housing market are unlike any other — the result of a housing crash unlike any other.

“Real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting,” said George Ratiu, senior economist at realtor.com. “Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can’t find.”

They also predict that the San Diego-Carlsbad metro sales will drop by 3.2%, and prices rise +0.2%.

Link to Realtor.com Forecast

Here are other similar forecasts:

California Association of Realtors NSDCAR (our local realtor assoc.) Forbes

From the enthusiastic Forbes article:

“Low interest rates and a shortage of starter homes will continue to push up prices,” DeFranco said. “This is especially the case for lower price points, since builders have tended to focus on more expensive, higher-profit houses and less on replenishing low inventories of entry-level homes.”

It seems the price growth may continue beyond 2020, too. Data from Arch MI shows the chance of home price declines at a mere 11% for the next two years. There are currently no states or metro markets projected to see prices declines in that period.

Who Will Give Them Away?

Hat tip to PC for sending in this doomy article about the future of real estate – an excerpt:

At some point, housing prices become so expensive that no matter how low interest rates go, the average household simply can’t afford to buy.

We may very well be at that point now. But even if not yet, it’s clear that the tremendous tailwind driving US housing prices since the Great Financial Crisis is sputtering out.

With this year’s plummet in mortgage rates and the seasonally-strong summer months just ended, one would expect a strong boost to home sales. But instead, Realtor.com just reported a highly unusual price drop from July to August — the largest summer decline seen since the company started compiling this data set.

Suddenly, many of the most incandescent of the red-hot US housing markets are now cooling off fast. This list of the 16 Fastest Shrinking Housing Markets includes San Francisco, San Jose and Boulder, CO

It’s not just prices that are slumping. Home construction is plummeting in hot markets, too. Take San Diego, which just reported that there were 43% fewer homes built in H1 2019 than the year prior. All of SoCal fell 25% for the same period.

What’s behind the sudden softening?

Well, as mentioned, affordability is a big issue. While wage growth has been anemic since the Great Recession, US household debt is now higher than it has ever been.

Read the full article here:

https://www.peakprosperity.com/home-prices-downhill-from-here/

We should get a steady stream of doom from now on because it’s such good click bait.  Just look for the only answer that matters in each article: who is going to give their house away?

San Diego Bubble vs. Other Cities

Our Case-Shiller Index did set a new record yesterday, but our Housing Bubble 2 is relatively tame – just 4% above the previous peak of 250.34 in November, 2005.

Compare to others like Seattle (+33% over last peak), San Francisco (+41%), and Denver (+59%) here:

https://wolfstreet.com/2019/08/27/the-most-splendid-house-price-bubbles-in-america-august-update-western-markets-see-the-dip/

2019 Bubble Report

Doesn’t it feel like we’re in another bubble?

Home prices have been on a tear for ten years straight, and are at their highest levels ever.

Is this bubble going to pop too?

Let’s look at the statistics first. I took the most recent 45 days to get the latest scoop, plus the MLS prefers to calculate the smaller sample sizes.

NSDCC Detached-Home Listings and Sales, April 1 – May 15 (La Jolla to Carlsbad)

Year
# of Listings
# of Sales
Avg $$/sf
Median SP
Median DOM
2012
640
415
$377/sf
$805,000
41
2013
788
464
$419/sf
$968,750
17
2014
791
376
$474/sf
$1,017,000
24
2015
785
448
$479/sf
$1,065,000
22
2016
774
439
$513/sf
$1,170,000
19
2017
726
445
$529/sf
$1,250,000
17
2018
749
394
$567/sf
$1,298,000
17
2019
712
379
$579/sf
$1,360,000
23
YoY Chg
-5%
-4%
+2%
+5%
+29%

It is remarkable that all-time-high prices aren’t causing more people to sell!

In previous markets, once prices started reaching new highs, homeowners would jump at the chance to move.  The inventory would grow and cool things off, and/or we’d hit an economic downturn and foreclosure sales would direct the market. But not today!

Other Factors:

We are a mid-level luxury market. The more-expensive areas like Los Angeles, Orange County, and the Bay Area feed us downsizers who think we are giving it away.

Homebuying has de-coupled from jobs. We do have substantial employers like Qualcomm, bio-tech, etc. but not near enough to justify these lofty prices. How do we keep afloat? It’s the big down payments; either from previous home sales, successful business ventures, or the Bank of Mom & Dad.

They changed the rules. Banks have to give defaulters a chance to qualify for a loan modification before they can foreclose. With everyone enjoying their equity position, they will find a way to hang onto their house or sell it for a profit, instead of lose it.

Mortgage rates around 4% are ideal.  Not likely to go up much either.

Reverse mortgages are an alternative for those who need money. They might crank down the amount of money you can tap, but as long as homeowners are flush with equity, they will be able to get their hands on some of it via reverse mortgages or the typical equity line.

Buyers have been full of money, and willing to blow it. I’ve seen sales close for 10% to 25% above the comps this year, so it doesn’t seem like people are worried about a bubble. Those sales could be creating unsustainable comps, and be short-lived values, but will the next buyer question them enough?

Coming Soon vs. ibuyer. We need a gimmick to transition us to the ibuyer era, and the ‘Coming Soon’ off-market sales will be the sexy distraction.  The price of an off-market sale isn’t necessarily lower than retail, and in some cases they can be higher when the buyers get jacked up about the opportunity.

The ibuyer era could be the last hurrah for open-market real estate.  If the big-money corporate buyers can build enough credibility and begin to dominate the space, they will be able to dictate the prices paid for their flips, and control the marketplace.  If so, they will make sure we won’t have another down market!

In the meantime, we might see prices start to bounce around, instead of the constant trend higher.  But if it gets harder to sell, then many will just sit tight instead.

If you think a bubble pop will happen, ponder this question.  Who is going to give away their home now?

Double Bubble?

More doomer talk at Wolfie’s, though he doesn’t say much other than some slight skittishness in the Case-Shiller Index equates to home prices going down – click here for 131 comments:

https://wolfstreet.com/2019/04/30/the-most-splendid-housing-bubbles-in-america-april-update/

He should consider the dearth of home sellers who would sell for any price.  Other bubbles have popped by banks giving away properties, but now that foreclosures got phased out and mortgage delinquencies are at all-time lows, who is going to cause a crash?

It’s much more likely that our market will stall/plateau, with the worst-case being a gradual decline over several years/decades.  I think other factors besides price will play an increasing role in the decision-making too, where well-located newer one-story homes continue to be very popular.

It will fracture the market further, where dumpy old two-story tract houses will need flippers to revive them while trendy new homes sell for a premium.  Newer condos closer to work are more desirable to many buyers than the older SFRs way out in the burbs.

Market statistics will become less reliable than ever.

Interesting to note that of all the metro areas he features in his article, San Diego had the lowest increase over the previous peak.  Others like Dallas and Denver are 50% above their previous peak!

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