No, We’re Not in a Housing Bubble, and Yes, Home Prices Could Keep Soaring — Here’s Why

Hottest topic I’ve been talking about…  happy to chat – contact The Caton Team – info@TheCatonTeam.com

 

No, We’re Not in a Housing Bubble, and Yes, Home Prices Could Keep Soaring — Here’s Why

Housing bubble 2.0 is probably more myth than reality.

 

By Sean Williams

 

If you own a home and you’ve visited real estate information websites Zillow, Trulia, Redfin, or any of the like recently, you’ve probably noticed an interesting trend: Your home is increasing in value at a rate that’s far and away higher than the national rate of inflation.

Is housing bubble 2.0 around the corner?

According to the S&P Case-Shiller Home Price Index, which tracks residential real estate prices nationally, as well as within 20 large metropolitan regions, residential real estate prices rose 5.3% between Aug. 2015 and Aug. 2016. By comparison, the national measure of inflation, the Consumer Price Index, has moved higher by a little more than 1% over the trailing 12-month period.

If we back the data out a bit further, the outperformance of housing prices becomes even more apparent. Real housing prices — essentially home price increases with inflation backed out — have risen by 25% just since 2012, and are now sitting at their highest point since the Great Recession. This is noteworthy considering that in the 107 years between 1890 and 1997, housing prices generally tracked the national inflation rate very closely, at least based on data from Robert Shiller in the book Irrational Exuberance. Only over the past two decades have we witnessed a diversion from the mean, with the first diversion leading to a massive housing bubble that’s still fresh in the minds of many homeowners.

This latest outperformance in housing prices, as well as the fresh memory of the recent housing collapse less than one decade prior, has some pundits predicting that housing bubble 2.0 could be right around the corner. A Dec. 2015 interview with 66 industry experts conducted by Zillow found that more than 10 believed the Boston, Los Angeles, and Miami markets were at risk of entering a bubble, while even more pundits believed New York and San Francisco were already there.

Home prices can continue to soar

However, it’s possible these industry experts could be completely wrong. Based on the evidence available at the moment, I’d contend that we’re not even close to a bubble in housing prices, and that home prices could very well outpace the national rate of inflation for many years to come.

Let’s have a closer look at why home prices could keep soaring.

  1. Supply constraints

The biggest factor that could push home prices continuously higher is the trade-off between homebuilder supply and homeowner demand. According to Jesse Edgerton, an economist at J.P. Morgan, most national markets simply don’t have the homebuilder supply to meet demand, and that’s unlikely to change anytime soon.

In an interview with Yahoo! Finance, Edgerton had this to say:

One might wonder if these high prices reflect growing demand that could soon elicit a wave of construction that would prove our forecasts wrong. We find, however, that high prices are concentrated in markets where supply is constrained by geography or regulation, suggesting there may be little room for additional construction.

Data from J.P. Morgan indicates that while housing prices are rebounding rapidly from their recessionary lows, homebuilders appear content in increasing their supply at only a modest pace. Furthermore, the areas where an expansion of construction would appear to be beneficial — San Jose, Los Angeles, San Francisco, and so on — are also the areas that are the most limited in their ability to respond to an increase in demand.

It’s tough to predict how homebuilders will respond if prices continue to climb. For some builders, the allure of profits may be too great to ignore. However, if homebuilders can prudently manage their supply growth, they’ll likely encourage home prices to head higher at a rate that handily outpaces inflation.

  1. A continuation of the low-lending-rate environment

Secondly, the ongoing low-lending-rate environment should continue to spur demand for new homes.

A home is arguably the largest purchase Americans will make during their lifetimes, and historically low mortgage rates could be the catalyst that coerces prospective homeowners to pull the trigger. Even more appealing is the fact that many Americans have far better FICO credit scores than they had a decade prior, meaning they’d probably qualify for sweeter deals from lenders.

Based on data released by FICO last year, the national average FICO score of 695 was an all-time high. Comparatively, the national average FICO score in Oct. 2005 was 688. FICO’s data showed a 3% increase in the number of consumers with a FICO score above 800 compared to the prior decade (FICO scores max out at 850), with a 2.1% decline in consumers with a FICO score under 550. Long story short, Americans appear to be in better shape than ever when it comes to getting a mortgage.

Though the Federal Reserve is the “X factor” here, and it can be completely unpredictable, the case for raising the federal funds target rate isn’t that strong. Inflation remains below the Fed’s target level, job creation has been up and down in 2016, and external factors, such as Brexit and China’s slowing GDP growth, could weigh on the growth outlook in the United States. After aiming for four interest-rate hikes in 2016, it’s quite possible the Fed ends the year without making a single move, which favors the continuation of a low-lending-rate environment.

  1. The “rent” vs. “buy” trade-off

Over the longer term, the trade-off between renting and buying a home would also seem to favor rising housing prices.

If interest rates do normalize over the long term and head back to around 3%, it would presumably work in favor of the rental market. Higher interest rates mean higher mortgage rates, which in turn should push on-the-fence homebuyers back into renting. When this happens, landlords become privy to significant rental pricing power and are able to increase rental rates well above the national rate of inflation. Just the expectation of rising interest rates at some point soon has been pushing rental prices around the country higher, at a pace that’s well above the national inflation rate.

However, there comes a tipping point in the renting vs. buying trade-off where rental prices increase enough that buying a home actually becomes the cheaper option on a monthly basis. It happened to me in 2007, and it could very well happen to millions of Americans as rental inflation increases.

While rising home prices might be a bit concerning, given the recency of the last housing bubble, the data would appear to suggest that home prices could continue to advance for many years to come.

 

I read this article at: http://www.fool.com/mortgages/2016/11/07/no-were-not-in-a-housing-bubble-and-yes-home-price.aspx

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Bubble Watch: Could the Housing Markets in These Top Cities Be Getting Too Hot?

If this isn’t the hottest topic in Real Estate – I don’t know what is.  Enjoy this article from Realtor.com

 

Bubble Watch: Could the Housing Markets in These Top Cities Be Getting Too Hot?

Home prices are skyrocketing faster than inflation. Bidding wars are breaking out. Shacks in the nation’s most scorching real estate markets are selling for over a million bucks. Things seem to be heading up, up, up. Sound familiar?

Déjà vu can be a spooky thing. Some folks these days are beginning to wonder whether the U.S. is seeing another housing bubble, like the one we suffered through beginning in 2007—and a reprise of the bloody financial carnage that followed when it burst.

Well, let’s get this out of the way right now, Chicken Littles of America: The sky isn’t falling, and the real estate market isn’t crashing. There are indeed a few warning clouds on the horizon (more on that below), but things in the world of residential housing are generally safe and steady and continuing to grow. Got that?

Those sky-high prices and ultracompetitive bids we at realtor.com® report on daily are mostly the result of a housing shortage rather than ominous signs of another real estate meltdown. The factors that led to the historic bust—easy-peasy credit for all, rampant flipping, frantic overbuilding—simply aren’t happening today.

In fact, the opposite is true these days.

“Only the most qualified buyers are able to get financing” for mortgages, says our chief economist, Jonathan Smoke.  “Flipping is back to normal. And we’re building about half as many homes as we need.”

As it turns out, not a single big metropolis in the good ol’ USA—that’s right, not even San Francisco or New York—appears to be “bubblicious,” says Smoke, who carried out an analysis of the 50 largest metropolitan markets in the country. During the bubble, home values were dramatically inflated, making the high prices unsustainable.

There are, however, a few super-duper expensive cities (San Jose, we’re looking at you) where the real estate market is showing signs of overheating, according to Smoke’s analysis. That means the high prices can’t be sustained—because as we all learned from high school (grade school?) science class, what heats up must eventually cool down.

In those smoking-hot markets, Smoke expects the relentless rate of price increases to eventually slow, or even dip, when prices hit a point that buyers can no longer afford.

“There are places that have risks,” Smoke says. “But even those places do not resemble what they looked like in their actual bubble years.”

To reach this conclusion, Smoke and the realtor.com data team analyzed 50 major housing markets from 2001 through 2015, using 2001 as a baseline year.

(Critics will be quick to point out that the country was just coming out of the dot-com bust in 2001, and then there were the terrorist attacks of 9/11. But despite those factors, housing experts consider 2001 to be the most normal, recent year before the bust, when homes were considered fairly valued. It is also the earliest year for which all the data were available.)

Smoke and his team then created an index of the six factors that create a housing bubble to assess whether any of these 50 markets were overheating. Here are the criteria:

  • Price appreciation: Are home values shooting up to abnormally high levels, outpacing inflation?
  • Home flipping: Are more homes being bought and sold for a profit within a year?
  • Mortgages:Is there a larger share of buyers getting mortgages, which they potentially could default on? Or are they paying in cash?
  • Home prices compared with wages:Are homes more expensive now for locals earning the local median income than they were in the past?
  • Home prices compared with rent prices:How do the costs of buying today compare with the costs of renting historically?
  • Construction: Are too many homes being built to meet the needs of the area’s population? If so, that could spell trouble.

We’ll say it again: None of the cities below is in a bubble. However, the top six cities—San Jose and San Francisco, CA; Austin, TX; Salt Lake City; Dallas; and Los Angeles—do show signs of overheating as prices continue to zoom up. The next four on the list—Fresno, CA; Buffalo, NY; Charleston, SC; and Portland, OR—show some elevated risk, but they seem to still have plenty of room to grow.

Let’s go to the list!

  1. San Jose, CA

Median list price: $981,500

Bubble index compared with 2001: +19%

Bubble index compared with market peak: -18%

This Silicon Valley hot spot shows the most signs of overheating, no doubt because prices jumped a whopping 10% last year when adjusted for inflation. That’s a year of seriously accelerated growth, even for the San Francisco Bay Area. Buyers are paying a premium to live in San Jose because there simply aren’t enough homes to go around, even with new construction.

But unlike the subprime borrowers who were scooping up homes before 2007, today’s buyers can actually afford the higher prices. About a quarter to a third of local real estate agent Nicki Brown’s sales are all-cash. Or the buyers are plunking down 30% to 50% on properties going for $2 million and up, says Brown, who’s with Alain Pinel Realtors.

  1. San Francisco, CA

Median list price: $855,000

Bubble index compared with 2001: +19%

Bubble index compared with market peak: -26%

Prices in neighboring San Francisco are likewise out of reach for many buyers due to the lack of residences for sale. But like their neighbors to the south in San Jose, plenty of well-paid San Franciscans can afford these properties.

Still, the insane bidding wars of previous years are tapering off as more newly constructed condos are coming online, says Patrick Carlisle, chief market analyst at local brokerage Paragon Real Estate. Luxury homes in the multimillion-dollar range are sitting on the market longer. And the area, which has seen a flood of new residents move in for work over the past few years, has recently been shedding tech jobs.

“After four years of a desperate, overheated, overbidding market … we’re in a transition to a more normal market,” Carlisle says.

  1. Austin, TX

Median list price: $400,000

Bubble index compared with 2001: +17%

Bubble index compared with market peak: -1%

The funky city, a bright blue spot in a deeply red state, may appear riskier than ever at just 1% below its peak. But it’s important to note that the recession didn’t hit Austin nearly as hard as other parts of the country. The city, with its growing tech sector, earned a spot on this list, because the cost of homeownership has since shot up as more people move to the recently crowned top city for millennial buyers.

But rather than crashing, prices will cool, says local real estate agent Josh Bushner of Private Label Realty. “The rate of increases has to slow down, unless everyone gets a 20% raise tomorrow,” he says.

  1. Salt Lake City, UT

Median list price: $347,200

Bubble index compared with 2001: +14%

Bubble index compared with market peak: -20%

The outdoorsy metropolis earned a spot on this list because home prices and rents have been rising faster than in the past, but prices are already starting to cool. Last year, they rose 6%—a full percentage point below the 7% national average. And unlike in many other cities, builders are actually putting up more of those sorely needed new homes.

Many of these residences are rising in new subdivisions about 30 minutes from the city limits, says local real estate agent Brook Bernier of Equity Real Estate. There are also new condo and apartment buildings under construction within Salt Lake City.

“Our economy is booming,” Bernier says, noting that more companies are moving to the area. That, combined with still relatively lower prices, means even “people with student loans can still afford a home.”

  1. Dallas, TX

Median list price: $335,000

Bubble index compared with 2001: +13%

Bubble index compared with market peak: -2%

Being so close to the previous peak of the real estate market, right before it crashed, may give Dallas homeowners and buyers the sweats. But it’s worth noting that, like Austin, the city wasn’t socked quite as hard as other major metros by that housing bust.

Although the local oil industry took a beating, prices in the Texas city still ballooned 9% last year. That’s because more companies are moving and expanding into the area, such as Toyota relocating its North American headquarters from California to nearby Plano, TX. Life beyond oil—it’s a wonderful thing!

“Is it scary that prices are up [9%]? Yes, it is,” says local real estate agent Debbie Murray of Allie Beth Allman & Associates. “But if the demand stays where we are, I don’t see prices coming down anytime soon.”

  1. Los Angeles, CA

Median list price: $690,000

Bubble index compared with 2001: +10%

Bubble index compared with market peak: -35%

The City of Angels shows signs of overheating as prices are up, construction is lagging demand, and there’s more home flipping in the celebrity hot spot than in most other parts of the country,

But the palm tree–lined West Coast mecca has steadily been moving out of the housing bubble danger zone, says Smoke.

“The Los Angeles market looked more overheated two years ago than it does now,” he says. “Price gains and flipping activity have both moderated from more intense levels.”

  1. Fresno, CA

Median list price: $272,100

Bubble index compared with 2001: +9%

Bubble index compared with market peak: -31%

While Fresno doesn’t appear to be overheating, prices are rising at higher rates than they have historically.

But the agricultural area, which is still reasonably priced, doesn’t appear headed for a bust.

“There were a lot of [home] flips three years ago,” says local real estate broker Alejandra Charest of Guarantee Real Estate. “Now it’s a struggle to find one.”

  1. Buffalo, NY

Median list price: $159,900

Bubble index compared with 2001: +7%

Bubble index compared with market peak: -1%

The former industrial powerhouse has fallen on hard times as manufacturing jobs have moved abroad, so it may come as a surprise that Buffalo made this list.

But although locals are still moving out (freeing up homes for buyers), home flipping and the number of new residences under construction are up.

“This could simply be [because] the housing stock needs an upgrade,” Smoke says of the construction. “Its age of housing is substantially older than the rest of the country.”

The city has also been experiencing a resurgence of sorts. Rundown buildings along the waterfront are being transformed into condos and apartments. Nearby shops and restaurants and a green space for outdoor events have sprouted.

“Buffalo has turned a corner,” says local real estate broker Ryan Connolly of Re/Max North.

  1. Charleston, SC

Median list price: $322,300

Bubble index compared with 2001: +7%

Bubble index compared with market peak: -20%

Prices in this coastal city, where horse-drawn carriages still run on the cobblestone streets, have been shooting up faster than they have historically. But the city’s economy is growing and unemployment has been steadily falling, reaching its lowest level in May since early 2008, according to the U.S. Bureau of Labor Statistics.

“We’re not really seeing incomes go up at the same rate as [home] prices,” Smoke says. But Charleston also has more high-paying jobs now than it has in the past. And compared with, say, Silicon Valley, buying a home in Charleston is still a relative bargain.

  1. Portland, OR

Median list price: $428,600

Bubble index compared with 2001: +6%

Bubble index compared with market peak: -26%

Portland may be known for its laid-back vibe, but lately, local buyers have been anything but. The housing shortage has led to fierce bidding wars and soaring prices—11% just in 2015—as more people move into the city while local laws and sluggish construction still limit the number of new residences that can be built.

However, buyers are still able to afford the price tags that are heavy on the zeroes.

“Buyers are concerned because prices have gone up so dramatically,” says local real estate agent Deb Counts-Tabor of Oregon Realty. “But this is basic Econ 101: supply and demand. And until one of those eases, prices will stay higher.”

 

I read this article at: http://www.realtor.com/news/trends/housing-bubble-2/?identityID=9851214&MID=2016_0722_WeeklyNL&RID=353497822&cid=eml-2016-0715-WeeklyNL-blog_1_housingbubble2-blogs_trends

Remember to follow our Blog at: https://therealestatebeat.wordpress.com/

Got Questions? – The Caton Team is here to help.  

Email Sabrina & Susan at: Info@TheCatonTeam.com

Call us at: 650-568-5522

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Connect with us professionally at LinkedIn: https://www.linkedin.com/in/sabrinawendtcaton

Please enjoy my personal journey through homeownership at:

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Thanks for reading – Sabrina

The Caton Team – Susan & Sabrina – A Family of Realtors

Berkshire Hathaway HomeServices – Drysdale Properties

Sabrina BRE# 01413526 / Susan BRE #01238225 / Team BRE# 70000218/ Office BRE #01499008

 

When Warren Buffet Speaks – We Listen… Buffett: There is NO Housing Bubble

Hello readers!

When Warren Buffet speaks – we listen.  I just had to post this article right away.  And I would love to know YOUR thoughts on the Bay Area Housing Market….

 

Buffett: There is No Housing Bubble

 

As home prices continue to surge upward, many in the industry are beginning to wonder if a housing bubble is imminent, or worse, if yet another financial crisis is in the making.

Warren Buffet, Chairman and CEO of Berkshire Hathaway, a multi-national conglomerate holding company, believes that the chances of home prices collapsing are very low, according to a recent report from Fortune by Stephen Gandel.

Although now may be a good time to buy a house, it is not as good a time as it was four years ago, Buffett stated at the Berkshire Hathaway annual shareholders meeting in Omaha, Nebraska. Fortune reported that Buffett thinks the chances of housing prices collapsing are very low.

Fortune reported:

“I don’t see a nationwide bubble in real estate right now at all,” said Buffett.

Buffett made remarks at the annual meeting Berkshire Hathaway, which took place on Saturday in Omaha. “In Omaha and other parts of the country people are not paying bubble prices for real estate,” says Buffett.

Although home prices continued their upward trek all over the country, they are doing so at a much slower pace, according to data on the recent U.S. House Price Index (HPI) released by the Federal Housing Finance Agency (FHFA).

The report showed a national 0.4 percent month-over-month increase from January to February, and a 5.6 percent annual jump between February 2015 and February 2016. January’s HPI report showed a 0.5 percent increase, which was revised downward to reflect a 0.4 percent increase.

The S&P/Case-Shiller U.S. National Home Price Index (HPI) found that home prices rose for the 43rd consecutive month in November 2015. According to the HPI report, home prices rose 5.3 percent year-over-year in November, slightly up from the 5.1 percent increase recorded in October 2015.

“Home prices extended their gains, supported by continued low mortgage rates, tight supplies and an improving labor market,” said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Sales of existing homes were up 6.5 percent in 2015 vs. 2014, and the number of homes on the market averaged about a 4.8 months’ supply during the year; both numbers suggest a seller’s market.”

The topic of bubbles forming in the housing market is something that has been thrown around for quite some time. As home prices soar to new heights—with no sign of decline—housing bubbles appear to be popping up in many markets and may be here to stay, according to Zillow’s Home Price Expectations Survey.

“Without 20/20 hindsight, it’s difficult to identify bubbles as they’re happening, but it is very clear that nationally we are not seeing a return of the conditions that caused the last national bubble,” said Dr. Svenja Gudell, Zillow’s Chief Economist. “Tighter lending restrictions today mean we aren’t seeing buyers get loans they realistically can’t pay back, like we did in years past. It’s significant that some experts are starting to worry about bubble conditions, but in my opinion, there’s no real danger of a severe crash like the one we all remember from the last decade.”

My two cents – talk of a housing bubble is a buzz here in the San Francisco Bay Area.  Though no one has a crystal ball – and as much as I want to tell my home buyers to hold tight – prices will come down – I cannot because I don’t see that in the forecast.  

Here is what we are experiencing the San Francisco Bay Area – We have had a BOOM in population due to job growth.  Most are in the tech industry – but we also have a strong Bio-Tech job market.  So we have a great job market – and yes I am taking into account the lay offs in Silicon Valley – but we also have very low inventory and very high demand for the past couple of years.  Loans are harder to get – meaning we cannot expect a crash due to bad loans.  In fact, the interest rate is still low though there is talk of raising it.  And while interest rates are low – borrowed money goes a bit further.  The only sign I see is the stock market.  With its drops – some of the cash buyers were counting on has disappeared – for the moment.  But that’s not enough to stop the housing market.  

I know my selling clients are figuring out ways to sell their home now.  And I see my buying clients getting discouraged with the pace of the market.  But if there is only one piece of advice I can bestow to you now is this – if you can and want buy a home in the San Francisco Bay Area – do it now.  Even if there is a slow down in the market, even if prices level off, historically – since the dawn of time, Real Estate has always recovered and always at a higher price than before the fall.

I don’t see a crash coming.  I do see a market adjustment as buyers dictate what they are willing to pay for a home.  And as money gets tight and the dream of home ownership stays strong – we will see a change.  But I wouldn’t hold my breath for a crash.  

I read this article at: http://www.dsnews.com/news/05-02-2016/buffett-there-is-no-housing-bubble

 Remember to follow our Blog at: https://therealestatebeat.wordpress.com/

Got Questions? – The Caton Team is here to help.  

Email Sabrina & Susan at: Info@TheCatonTeam.com

Call us at: 650-568-5522

Want Real Estate Info on the Go? Download our FREE Real Estate App:  http://thecatonteam.com/mobileapp

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Please enjoy my personal journey through homeownership at:

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Thanks for reading – Sabrina

The Caton Team – Susan & Sabrina – A Family of Realtors

Berkshire Hathaway HomeServices – Drysdale Properties

Sabrina BRE# 01413526 / Susan BRE #01238225 / Team BRE# 70000218/ Office BRE #01499008