Housing market bubble hyperbole

housing market bubble
Housing Market Snapshot (infographic from nar.realtor)

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.

Copyright© Dan Krell
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Negative equity stats likely erroneous

negative equity
What is a short sale (infographic from lender411.com)

Before the Great Recession, there was the foreclosure crisis of 2007. That was the year that the housing bubble popped and home negative equity soared. Many home owners negotiated with their lenders to keep their homes, while others lost their homes to foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 was one of the first measures to assist distressed homeowners during the financial crisis. The Act initially was to end in 2009 but has been extended annually. The Act was recently retroactively extended for 2017.

The purpose of the Act was to address tax liabilities that distressed homeowners faced when they tried to save their homes. Because debt forgiveness is typically considered taxable income, a mortgage balance reduction via mortgage modification or short sale would have resulted in a tax bill to a homeowner who was already experiencing a financial hardship.

Recent home equity gains in the housing market should help many home sellers who would have otherwise needed a short sale. Highlights from CoreLogic’s Q4 2017 Home Equity Report (corelogic.com) indicated that about 4.9 percent of mortgaged homes have negative equity (which is a huge improvement from the almost 31 percent reported in 2012 by Zillow’s Negative Equity Report). Additionally, CoreLogic reported that the national average of home equity gained by homeowners over the past year was in excess of $15,000. However, there is disparity in home equity growth by region.

Dr. Frank Nothaft, chief economist for CoreLogic stated:

“Home-price growth has been the primary driver of home-equity wealth creation. The CoreLogic Home Price Index grew 6.2 percent during 2017, the largest calendar-year increase since 2013. Likewise, the average growth in home equity was more than $15,000 during 2017, the most in four years. Because wealth gains spur additional consumer purchases, the rise in home-equity wealth during 2017 should add more than $50 billion to U.S. consumption spending over the next two to three years.”

The National Association of Realtors testified on March 14th to the U.S. House Ways and Means Subcommittee hearing on “Post Tax Reform Evaluation of Recently Expired Tax Provisions” to make the Mortgage Forgiveness Debt Relief Act permanent. In his testimony, Realtor Barry Grooms discussed the plight of many homeowners who are surprised to find that they are upside-down on their mortgage despite national home price gains.

Grooms made an argument why the Mortgage Forgiveness Debt Relief Act should be permanent.  The Act has been retroactively extended each year in recent years leaving many short sellers “sweating it out” until the end of the year.  Part of the decision-making process for a short sale is a potential tax liability. Many home sellers take the chance that the Act will be renewed retroactively. But others do not want to take the chance of incurring a large tax liability.

Negative equity statistics are likely to be erroneous. The number of homes with negative equity is probably under-represented due to deferred maintenance.

Yes, home prices have significantly increased, which has grown home equity. But the statistics for home equity assume that all homes are worth “retail value.” The retail value of a home is the full price a home can sell. In today’s market the home must be in better-than-average to excellent condition to sell for retail value.  We don’t know the real value of any home until it’s sold.

In his testimony, Grooms touched upon a number of issues why homeowners are selling for less than they owe. However, not addressed by Groom is the number one reason why homeowners are under-water and why many home sellers need to sell via short sale. Property condition. The property condition crisis was highlighted in a February 2013 article by the Harvard Joint Center of Housing Studies entitled “The Return of Substandard Housing.” The lack of updates and/or deferred maintenance in a home can significantly decrease its value.

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Stock market and home buying

stock market
Real estate and the economy (infographic from nar.realtor)

It’s easy to understand why the recent stock market volatility triggered some into proclaiming that the sky is falling.  The potential for losing money can evoke some strong emotional responses.  Interestingly, some experts have speculated how the recent stock market activity would spill over to consumer spending, including the housing market.  Reporting such as Jacob Passy’s recent article titled “Could Stock Market Volatility Cause House Prices to Fall?” (Marketwatch.com; February 8, 2018) makes for good click-bait.  However, the details of the article would suggest otherwise.  The consensus is that the recent Wall Street activity is not likely to impact the housing market.

Passy is trying to make an argument that the housing market will suffer from the recent stock correction, and subsequent interest rate increases.  But Daren Blomquist, senior vice president of communications at Attom Data Solutions [formerly RealtyTrac], was quoted in Passy’s article saying “The strength of the housing market and economy in general is what’s spooking the stock market.”  However, the volatility may make some home buyers wary of making an investment in housing.

The stock correction and increased Wall Street volatility is not a new phenomenon.  The last market correction with lasting volatility occurred in June and August of 2015,through the fall.  The current stock market volatility is part of the cycle of a healthy economy.  Unlike the crash of 2008, current economic fundamentals are positive.

This stock market correction is not unusual, however it is extraordinary.

Seeking Alpha noted that the percentage drop for the two largest Dow losses this year are not even in the top 100 (10 Figures On Historic Dow Correction; seekingalpha.com; February 6, 2018).  And this correction is distinct, according to ZeroHedge, because most individual stocks were left intact (If This Correction Is Over, It Will Be Unique in Leaving Most Individual Stocks Unscathed; zerohedge.com; February 13, 2018).  Many individual stocks actually made gains while the Dow and the S&P stocks “took it on the chin.”  This phenomenon is unique and is said to demonstrate that the economic fundamentals are working.

As for rising interest rates, they are needed to moderate home prices.  If home prices aren’t controlled by market forces, such as interest rates, then homes will become unaffordable for many home buyers.  Mortgage interest are still historically low, even with recent increases.

Homeownership is out of reach for many home buyers because of increasing home prices.  David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, declared in the January 30th S&P CoreLogic Case-Shiller  Home Price Index release:

Home prices continue to rise three times faster than the rate of inflation.  The S&P CoreLogic Case-Shiller National Index year-over-year increases have been 5% or more for 16 months; the 20-City index has climbed at this pace for 28 months.”

Blitzer pointed out that these increases are not based on home buyer demand, stating, “Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices.”  Instead, sharp home price increases are due to the lack of homes for sale and new construction.  And until housing inventory increases, “home prices may continue to substantially outpace inflation.

Lawrence Yun, chief economist for the National Association of Realtors, remarked that the recent stock market volatility should not impact the housing market.  He stated, “Underlying economic fundamentals remain strong.”  However, he cautioned that if the stock market retreats further, it could affect home buyers who plan to use funds from their 401k’s and other investment vehicles as down payment sources.

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Prime housing move by Amazon

prime housing
Insight into Amazon (infographic from geekyedge.com)

Amazon is about to make a decision on their “HQ2.”  The highly anticipate decision can be a prime housing move not just for the chosen city, but the region.  As you now know, Montgomery County is on the short list.  Some even have it pegged to be in the top five.  Although many local residents are excited at the prospect of increasing home values, many others are anxious how a Montgomery County Amazon HQ2 will affect their quality of life.

If Amazon chooses Montgomery County, the county will likely see a similar impact that Seattle experienced.  However, rather than be purely speculative, let’s look how Amazon has shaped Seattle.  Stephen Cohen offers interesting statistics looking at how Seattle has changed after Amazon (How Seattle Changed After Amazon Came to Town; seattlepi.com; September 22, 2017).  Cohen points out that Amazon has been based in Seattle since the mid 1990’s, and that the major impact on the town happened when the company moved to the South Lake Union campus (SLU) in 2010.  Since the move, Amazon’s stock price skyrocketed and its market cap exceeded (and has since doubled) that of Walmart.

Cohen’s data goes beyond the pros and cons of having the business giant in the community and compares statistics that span from 2010 to 2017.  During that time, Seattle’s population grew 17.3 percent.  However, it remained as the 18th most populous US city.  Although Seattle followed the national trend of becoming more diverse, its African American population slightly decreased (which was counter the national trend).  Cohen describes Seattle’s population as “skews male,” probably because Amazon’s “workforce is 63 percent male.”

housing
Seattle Case-Shiller home price index (graph from businessinsider.com)

But the home values…Seattle has had one of the hottest and prime housing markets in the country. Seattle’s average home price increases are almost double the national average.  Finding housing in Seattle is very difficult, as the town’s vacancy rate significantly decreased to about half that of the national average.  The city’s median gross rent is 47.6 percent higher than the national average.

Other interesting facts from Cohen’s data…one-person households decreased from about 15 percent to slightly more than 10 percent.  There was a 25.2 percent increase in commuters.  And, the city’s mean household income increased 41.3 percent, which is more than double the national average.

Prime housing is not for everyone.  Cohen cites the sharply increased cost of housing and high cost of living for negatively affected the poor, as well as the middle class.  And although Seattle is the 18th largest US city, it has the third largest homeless population (according to a December 7, 2017 Seattle Times expose “King County homeless population third-largest in U.S.”).

But, Lisa Stiffler reported that Amazon’s philanthropic corporate culture has noticeably changed (What gives? Tech giant Amazon finally boosts its philanthropic rep in its hometown; geekwire.com; December 14, 2016).  She notes that it is evident that employees are volunteering and getting involved with such activities as the Amazon “Non-Profit Expo.”

Seattle’s SLU is described by Stephen Cohen as an “Innovation District,” which is a Brookings Institute term for a “geographic areas where leading-edge anchor institutions and companies cluster and connect with start-ups, business incubators, and accelerators.”  SLU is similar to Montgomery County’s Technology Corridor.  An Amazon move to MoCo’s Tech Corridor would likely dovetail with a $100 million plan to improve I-270 (the infrastructure plan was reported by the Washington Post last April).  Such infrastructure improvements would open up Maryland’s western real estate market, which would ease some of the upward pressure to MoCo’s already tight prime housing market and already increasing home prices.

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Neighbors affect home values

good neighbors
Good Neighbors (infographic from appfolio.com)

The housing market has been fairly good in recent years.  In fact, the shortage of homes for sale has shown how competitive home buyers can be as they try to outbid their cohorts for hot properties.  Even homes that are in need of “tlc” or have been neglected in some way have found new owners too.  But, as I have mentioned in the past, not all homes sell.  And for some home sellers whose homes have not sold, they only need to look their neighbors.

That’s correct.  Your neighbor may have more sway over your home sale and property value than you think.  A 2013 news item from the Appraisal Institute warns home sellers and buyers about the neighbor factor (Bad Neighbors Can Reduce Property Values, Appraisal Institute Warns; appraisalinstitute.org; January 30 2013).  Not only can bad neighbors affect your sale, but can “significantly reduce nearby property values.”

Former Appraisal Institute President Richard L. Borges II, MAI, SRA stated:

I’ve seen many situations where external factors, such as living near a bad neighbor, can lower home values by more than 5 to 10 percent…Homeowners should be aware of what is going on in their neighborhood and how others’ bad behaviors could affect their home’s value.”

“Bad neighbors” are often characterized as inconsiderate, if not sometimes belligerent.  Typical neighbor complaints stem from pets, excessive noise, and poor exterior home maintenance.  In high density neighborhoods (such as townhomes and condos), parking and trash/recycling debris can also be a source of neighbor conflict.

Neighbor disputes are often resolved by talking it out.  However, if you find that your neighbor is not receptive, you may have other avenues of recourse.  If you live in a Homeowners or Condo Association, your association may offer assistance in resolving your issue.

Montgomery County addressed the issue by enacting “Good Neighbor” ordinances in 2011 “to preserve the quality of life” in the county.  The purpose was to reduce the influx of commercial influences into residential neighborhoods, and maintain their domiciliary character.  These ordnances were directed at home based businesses, parking of commercial vehicles, off street vehicle parking, and paving of front yards.

If you believe your neighbor issue arises from a code violation, you can contact the appropriate county department to investigate a complaint.  For example, Housing Code Enforcement can investigate such things as housing and building standards, overgrown weeds, and excess debris in yards.  Whereas the Department of Police – Animal Services Division can investigate common pet complaints such as an unleashed pet roaming the neighborhood, or a neighbor not cleaning up after their pet does their business on your yard or common areas.

Unfortunately, there are occasions where trying to resolve your neighbor issues civilly comes up short.  In extreme instances, however, you may have to seek legal counsel.

Being a good neighbor is a two-way street, often requiring some compromise and offering assistance.  Housing experts suggest that you can resolve your neighbor issues by talking to them.  All too often, neighbors who seem neglectful of their homes are actually in need of assistance.  Regardless of their issues, they may be too proud to ask for help, they don’t know where to get help, or they are so overwhelmed they don’t know they need help.  Talking to your neighbors and lending a hand can not only mend fences and build a stronger community, but may also increase the value of your home.

Copyright© Dan Krell
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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.