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.
Our blog friend Ryan touched on the thought on everyone’s mind today – will the impending recession have an effect on real estate? There were 23 comments – see his blog post plus lively discussion here:
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)
# of Listings
# of Sales
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!
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.
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?
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!
There is a very similar story with the risk of a housing bubble.
Real house prices nationwide are again considerably above their trend levels, although in real terms they are still 10–20 percent below their bubble peaks. However, unlike the bubble years, high house prices do not appear to be driving the economy. Residential investment is actually still below its long-term trend measured as a share of GDP. As noted with reference to the stock bubble, consumption is at moderate levels relative to disposable income, indicating a limited housing wealth effect.
Furthermore, this run-up in house prices does appear to be driven largely by the fundamentals of the market. Rents have been substantially outpacing the overall rate of inflation, especially in the markets with the most rapid increases in house prices, like Seattle and San Francisco. Also, vacancy rates have fallen sharply from the peaks reached in the recession, and are low in markets seeing rapid price rises.
There are some causes for concern in the current housing market. In particular, the bottom third of the housing market in several major cities is seeing the most rapid rate of price appreciation.
This raises the risk that many moderate-income homeowners may be buying into bubble-inflated markets, as happened in 2002–2007. That is potentially very bad news for these homeowners who may see their life’s savings disappear quickly if house prices fall 15 to 30 percent. That will not lead to a financial crisis since there is not enough money at stake in these mortgages (most of which are backed by either Fannie Mae, Freddie Mac, or the FHA), but it would be an unfortunate loss to these new homeowners.
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