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Rising Home Prices Are Slowing

Mike thinks this year’s price explosion was unusual, and is working its way back to a more-normal pace.  I agree with Mike, and think the market will split, with those products that have been the hottest (one-story homes, family homes with yards and pools, etc.) will stay red hot, while those on the fringes (inferior locations, condition, age, etc.) will struggle to keep up and their appreciation rate will flatten faster.

Here is his Twitter thread, and webinar – thanks Mike!

https://twitter.com/mikesimonsen/status/1403085966424698884

More Shiller

The housing market is hot as home prices continue to rise, but Nobel Prize winning economist Robert Shiller predicts prices will eventually drop. “They’ll come back down, not overnight, but enough to cause some pain,” Shiller told Yahoo Finance Live.

The latest S&P CoreLogic Case-Shiller national home price index posted a 13.2% annual gain in March, the fastest pace prices have risen in more than 15 years. Last week, the National Association of Realtors (NAR) reported the median existing-home price in April was $341,600, up 19.1% from April 2020.

“This is not a market that collapses overnight,” Shiller said. “It’s less short run volatile than the stock market. But you can see that we’re seeing price increases now that haven’t quite been realized since those years just before the financial crisis.”

Shiller said there is no “clean explanation” why the housing market is so hot. He expects it to continue another year or two driven by low interest rates and the COVID-19 pandemic work-from-home revolution.

But Shiller cautions that people are also driven by narratives and market sentiment. It’s a topic he wrote about in his book “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.”

“I think it is some kind of irrational exuberance,” he said. “People are having fun, and they will as long as prices keep going up.” He said today’s housing market looks similar to 2003. “There is excitement and people are talking and some people are bidding way more than the asking price and that becomes a narrative or a story.”

But he tempers his comparison saying the current housing craze is different from the mortgage crisis that caused the last housing bubble to burst.

“So it’s not the same as 2003,” Shiller said. “It could be stronger. I think we have better protections, we have better supervision of lenders. So I don’t know if we should be worried about 2007, 2008, 2009 happening again.”

The current run up in prices, according to Shiller, “is disquieting” and he cites Phoenix as an example. “The biggest increase over the last year was Phoenix and home prices have gone up 20% in one year,” he said.

Shiller points out that demand in the housing market gets all the headlines while supply tries to catch up. Record prices for lumber, he says, are driving up prices for newly built homes. “The builders might be building to profit from these high prices now. But, it hasn’t happened yet,” said Shiller and that has him worried.

Shiller helped create the CME S&P Case Shiller home price index futures 15 years ago so people could hedge their risk during housing markets like this one. “So our futures market is now predicting big increases over the next year or more but it’s not certain,” he said.

“It kind of reminds me of the spirit that ended after World War II,” Shiller said. “There was a spending spree by people. They were jubilant the war was over,” he said comparing the mood of the country then to the mood now as the United States emerges from coronavirus pandemic.

https://finance.yahoo.com/news/robert-shiller-home-prices-to-fall-and-cause-some-pain-103750858.html

Shiller – “Wild West”

Shiller has been too conservative on his predictions because he’s an ivory-tower guy. If he were to talk to potential home sellers, he’d find that there aren’t many – if any – who have to move so badly that they would sell for “substantially lower” prices.  The next phase after the frenzy will be the stagnant/plateau stage where the demand thins out and sellers wait for that perfect nuclear family with 2.2 kids to come along some day.

Nobel prize-winning economist Robert Shiller is worried a bubble is forming in some of the market’s hottest trades. He’s notably concerned about housing, stocks and cryptocurrencies, where he sees a “Wild West” mentality among investors.

“We have a lot of upward momentum now. So, waiting a year probably won’t bring house prices down,” Shiller said.

According to Shiller, current home price action is also reminiscent of 2003, two years before the slide began. He notes the dip happened gradually and ultimately crashed around the 2008 financial crisis.

“If you go out three or five years, I could imagine they’d [prices] be substantially lower than they are now, and maybe that’s a good thing,” he added. “Not from the standpoint of a homeowner, but it’s from the standpoint of a prospective homeowner. It’s a good thing. If we have more houses, we’re better off.”

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!

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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/

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