Housing market bubble hyperbole

Timing, as they say, is “everything.” Predicting the housing market is tricky. Even the best economists can get it wrong. Aptly, however, there is that group of naysayers who always believe the homes are overpriced and we are in a housing market bubble status. And you know what they say about a broken clock, it’s correct twice a day.

There’s no way around it, housing market trends are cyclical. Eventually, the housing market will crash and home prices will recede. But, like the phoenix, will again be reborn to go through it’s life cycle. According to Harvard’s Teo Nicolais (extension.harvard.edu/faculty-directory/teo-nicolais), there are four phases to the housing cycle. The cycles were described in 1876 by economist Henry George and modernized by Glenn R. Mueller to include recovery, expansion, hypersupply, and recession. Nicolais predicts that, aside from the occasional slowdown, there won’t be an honest to goodness housing crash until 2024.

You may be saying, “But Dan, the market feels just like the housing market bubble before the last crash.” And in some respect, you may be correct. At that time, home sale inventory was low, and home prices seemed on a never-ending climb. However, even though we have similar conditions, the current housing market is in a different cycle than where we were thirteen years ago.

Back in 2005 I reported that the active inventory of Montgomery County single family homes for sale for June 2005 increased to 2,004 units. Homes were selling at rapid rate, as the number of contracts increase 2.5 percent during June 2005 compared to 2004. And there was almost a 13 percent price appreciation from the previous year. The 2005 housing market was clearly in a rapid expansion phase. Oversupply began in late 2006 when Montgomery County single family home inventory hovered around 4,000 units for the better part of the summer and fall. And of course, the rest is history.

There is some disagreement about the current phase of the housing market. Some say the market is in the beginning of an expansion cycle, while others (like me) believe we are still in the recovery cycle. Yes, Inventory is tight. But as I reported recently, not all homes are selling. Which is contrary to the expansion of 2005, when it seemed as if all homes sold quickly regardless of condition. Home prices are increasing, but at a more reasonable rate than they did thirteen years ago. Although it may feel that houses sell in less than a week, the average days on market for homes that sell is currently 33 days in Montgomery County (according to MLS stats), and 78 days nationwide according to Zillow.

Another factor that is playing into current housing market conditions is mortgage interest rates. Unlike the housing market bubble of thirteen years ago, interest rates are increasing and is anticipated to help mitigate the home price spikes.

Sure, there are regional markets, such as Seattle and Denver, that lead the country in home price gains (typically double digits). But most everywhere else, real estate prices are improving gradually. Moreover, regional markets each have their own hot neighborhoods that grab the headlines too. Hot neighborhoods tend to be where investors, flippers and first-time home buyers converge.

Is there a housing market bubble? Are we headed to a market crash like we experienced in 2007? No, at least not in the short term. More likely, the market may be affected in the near future by a mild (and overdue) economic slowdown. Unfettered, the housing market will continue its herky-jerky pace.

By Dan Krell
Copyright © 2018.

Original located at https://dankrell.com/blog/2018/06/28/housing-market-bubble-talk/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

June 3, 2016November 23, 2021

Housing bubble countdown

The March S&P/Case-Shiller U.S. National Home Price Index (spindices.com) was announced May 31^st to reveal a 5.2% increase in home prices. Although down from last March’s 5.3% increase, home prices seem to be appreciating at a regular pace, with the metro areas of Portland, Seattle, and Denver leading the way with double digit gains (year-over-year price increases of 12.3%, 10.8%, 10.0% respectively). As home prices climb, so too are the claims that we are experiencing a housing bubble.

Those concerned about the next bubble have been ringing the alarm bells since last fall, when the combination of limited inventory, multiple offers, and rising prices created an environment in some regions that was reminiscent of the go-go market just prior to the last market bust. And like the broken watch that is correct twice a day, those naysayers may eventually be correct – but it may not be for another eight years.

How to predict a housing bubble

According to Ted Nicolais, the real estate cycle has been steady since 1800 (How to Use Real Estate Trends to Predict the Next Housing Bubble; dce.harvard.edu; February 20, 2014). Writing for the Harvard University’s Department of Continuing Education’s The Language of Business blog, Nicolais maps out Homer Hoyt’s cycles and found a regular 18-year cycle to the bubble and bust housing market (albeit two exceptions).

The 18-year cycle, as it turns out can be observed by analyzing trends. An applying Henry George’s four phases of the real estate cycle (as modernized by Glenn R. Mueller), Nicolais can determine how and when the next housing bubble will occur. (Henry George was a nineteenth century economist who studied the boom-bust cycle of the economy).

The first phase is the “recovery.” Home prices are at the bottom, and demand increases. Real estate vacancies decrease as economic activity increases, which fuels the economy.

The second phase is the “expansion.” Housing inventories dwindle, there is little is available to buy, and finding a rental becomes difficult. Nicolais explains that an issue with real estate is that once demand increases, filling inventory takes a long time. New development can take two to five years. Until new inventory is added, price growth accelerates; and rather than valued at market conditions, real estate becomes priced to future gains. During a real estate boom, people buy into the prospect of “future growth” and believe the escalating prices are reasonable.

Phase three is “hyper supply.” When the completion of new development begins to satisfy demand, inventories fist stabilizes and then swells. Price growth begins to slow. Nicolais stated that the amount of continued development will determine the severity of the impending recession; while demand is satiated, new inventory comes to market and vacancies increase. He asserted that “wise” developers stop building during this phase.

Phase four is the “recession.” New development is stopped, while projects coming to completion add to a growing inventory. Occupancy rates and prices fall; property values and profits dwindle. Developments in mid-construction may not be completed because they are no longer financially feasible.

Following the four phases and the 18-year cycle; Nicolais stated that the great recession was not caused by external forces, but rather occurred on schedule! He figures that the current housing market is transitioning from recovery to an expansion phase. And with the exception of the occasional slow down, he predicts that the next housing bubble will be in 2024.

Original published at https://dankrell.com/blog/2016/06/03/housing-bubble-countdown/

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May 15, 2013June 30, 2019

A balanced real estate market emerges despite fears of a housing bubble

As talk of a housing recovery is gaining traction, some experts are saying the recovery may be artificial and short lived. Warnings from economists and a former mortgage executive paint a picture of a possible housing bubble being caused by the source they claim is cause for increasing home prices.

Steve Cook, of Real Estate Economy Watch, revealed a recent survey of 105 economists, real estate experts and investment and market strategists. Although respondents predicted positive home price appreciation through 2014; the experts expect that home prices won’t fare as well during ensuing years through 2017. Furthermore, 48% of the respondents felt that current Federal Reserve monetary policy might be the reason for recent home price spikes; which may be creating a future housing bubble.

A majority of the expert panel suggested that requiring a minimum down payment in the Qualified Residential Mortgage (a provision to allow lenders to bypass credit risk retention rules) would create a long-term sustainable housing market. However, only about a third of respondents believe that a minimum down payment should be 20% or more.

An April 9th online article for The Wall Street Journal titled “Is the Fed Blowing a New Housing Bubble?” written by former Fannie Mae executive, Edward Pinto, explores the source for of the housing recovery. Pinto pointed out that although recent home price surges are the highest since 2006, data released by the Federal Housing Finance Agency (FHFA) indicate that home price increases may not be due to “broad based improvements in the economy’s fundamentals.” But rather, home price increases are being driven by low interest rates due to the Fed’s Quantitative Easing program.

Pinto compares current market conditions to those of 2006, when government policies also likely contributed to a housing bubble. During that period, like today, income is not keeping pace with home price increases. As an example, he cited FHFA’s conventional home-financing data that indicated new home purchase prices increased 9% during February 2013 and 15% during February 2013; while income barely increased 2% (keeping relative pace with inflation).

Pinto and his assessment of recent home price spikes are getting some attention. John Aidan Byrne of the NY Post wrote on May 6th (“Next Home Crisis”) about Pinto and his concerns. Because suppressed interest rates are pushing home sale prices up, Pinto surmises that when the Fed’s QE program ends, interest rates will rise creating an “inevitable housing disaster.” However, he concludes that to avoid a housing disaster: income must increase 33%, home sale prices will drop about 25%, or lending standards must loosen significantly. He points out that loose lending policies did not end well in the last housing bubble (http://www.nypost.com/).

Regardless of murmurs of another housing bubble, current market conditions might indicate a balanced market. The trend of monthly local absorption rates compiled from the local multiple list service has consistently shown to be in recent months between a buyer’s market and a seller’s market (absorption during a buyer’s market tends to be below 50%, while a seller’s market tends to be above 60%).

Even though there is little inventory, supply and demand may be in overall balance. However, that being said; supply and demand seems to be out of balance for well priced updated homes, which appear to the source of bidding wars and escalation clauses. Homes priced above the market and/or needing repairs/updates take longer to sell.

By Dan Krell
Copyright © 2013

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

May 1, 2013June 29, 2019

Hybrid housing market not for the squeamish

A “hybrid” housing market is has a little bit of everything. There are the multiple offers and escalation clauses, as well as the homes that sit idle for days (both could be on the very same block!); buyers willing to pay more than list and those offering less. The result is frustration among buyers and sellers who are disappointed by not having their expectations met; and even a few real estate agents are losing their cool. What is becoming increasingly apparent is that the current housing market is not for the squeamish!

Although few home owners are venturing to list their homes, those who do may be seeking a premium price; most likely due to the optimism permeating the air. Furthermore some are expecting the prize of getting multiple offers with escalation clauses. Owners of homes that do not sell within the first week of listing are anxiously wondering, “Why hasn’t my house sold yet?”

The flip side is that although home buyers are plentiful (compared to the current home inventory), there still seems to be many home buyers who seek to buy a home at a 5%+ discount. Unlike the “bargain hunter,” many of these home buyers are more concerned with future home resale (which may be indicative of a lack of confidence in the future housing market).

Pressure on home buyers and sellers is likely originating from reports of bubble activity pockets that seems to be popping up, and recent home price indices that indicate increasing national average home prices. Regardless, there appears to be a lack of symmetry among home sales as well as a lack of consistency among home buyers and sellers.

So if you’re planning a home sale or purchase, what are you to make of this? You should understand that national home price indices are comprised of multiple regions, and much of the national home price increase is due to regions that had the highest home price declines over the last six years, as well as a few pockets of very hot activity (unlike the home price climb during 2004-2006, which was mostly due to high confidence in the housing market, easy credit, and a much different economy). Likewise, the Metro DC region is microcosm of the national picture, such that it is comprised of a number of counties that realized double digit home price decreases, as well as a few pockets of hot activity.

To add some perspective to local market trends, the average days-on-market of a home in Montgomery County is roughly 60 days (depending on the source). Additionally, Montgomery County single family home data compiled by the Greater Capital Area Association of Realtors® (gcaar.com) indicated that median and average single family home price decreased year over year for the last three consecutive months. And while the number of homes listed continues to decline, the number of pending home sales (homes under contract) has also declined in March year over year, as well as year to date.

Getting into the market requires solid data, a strategy, and an open mind. If you’re selling: consult with your agent about recent neighborhood prices; and stay informed of all activity, as it could be your cue to decisions made on the sale. If you’re buying: in addition to discussing comp data, you should consult with your agent about a strategy to deal with competition from other home buyers.

By Copyright
© 2013

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

April 3, 2013November 23, 2021

When will move-up homebuyers return to the housing market

by Dan Krell
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DanKrell.com
© 2013

Move-up home buyers missing from housing recovery; when will move-up home buyers return to the housing market?

I recently came across an interesting article about “move-up” home buyers online titled, “Move-up Buyer Provides The Base For A Recovering Housing Market.” The piece, published by the Chicago Tribune, is not unlike the many articles you might find today about the missing move-up buyer in the housing recovery. However, this article is different – it was published August 17, 1985 (article can be found here: articles.chicagotribune.com/1985-08-17/news/8502240441_1_interest-rates-trade-up-market-home-resale-market).

The striking similarities between the current housing recovery and a real estate market that was recovering from one of the deepest modern recessions up to that time (during the early 1980’s), includes home buyer behavior and economic concerns. And of course, the affected move-up buyer sector and the dearth of inventory appear to be familiar.

Home buyer behavior doesn’t have seemed to have changed much as many would-be home buyers are trying to time their purchase with the market bottom. At that time, like today, interest rate pressures are helped home buyers decide to jump into the market; additionally, then like today a significant number of buyers were first time home buyers. Downward pressure on mortgage interest rates, combined with the fear of rising rates affected home buyers to get off of the fence. However, peek mortgage interest rates averaged about 15% in the early 1980’s.

Another similarity between both periods is the missing move-up market. The typical move-up home buyer is sometimes described as a home owner who decides they need more space, which results in the sale of their smaller home and the purchase of a larger home. Then like today, the move- up home buyer was the missing piece to the housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek. However, it seems as if a “psychological barrier” (as described by the Chicago Tribune piece) holds back many move-up buyers today as it did in 1985. During the current housing recovery, many potential move-up buyers have remained in their homes.

Like other housing recoveries, one of the main issues holding back the move-up buyer is housing appreciation. During an early recovery, home owners may have a difficult time rationalizing buying a larger more expensive home when the new home could depreciate the first year of ownership, let alone the thought of a perceived loss of equity in their current home.

As home prices stabilize it would be reasonable to think that there will be an increased presence of the move-up home buyer. A good example of this was in the housing recovery that took place during 2003-2004. At that time, low mortgage interest rates helped first time home buyers back to the marketplace, and the move-up buyer sector took off relatively quickly when rapid home appreciation was realized. Of course rapid home appreciation was a function of “easy money” that generated real estate speculation that produced the “go-go market” of 2005-2006, the housing bubble, and the subsequent financial/housing crises.

The similarities of a post recession housing recovery might indicate there is currently progress. However, the move-up home buyer sector may be one of the final pieces to the recovery puzzle; and until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published the week of April 1, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

How to predict a housing bubble

As talk of a housing recovery is gaining traction, some experts are saying the recovery may be artificial and short lived. Warnings from economists and a former mortgage executive paint a picture of a possible housing bubble being caused by the source they claim is cause for increasing home prices.

by Dan Krell Google+ DanKrell.com © 2013

Move-up home buyers missing from housing recovery; when will move-up home buyers return to the housing market?

by Dan Krell
Google+
DanKrell.com
© 2013