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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Housing inventory crisis?

housing inventoryThe low housing inventory crisis has plagued the housing market for about six years.  Low inventory has frustrated home buyers and all but eliminated move up home buyers.  The ongoing housing inventory crisis is an obstacle to a balanced housing market.

As a result of the ongoing housing inventory crisis, existing home sales may see a decline in the next few months, when spring sales should be strong.  Seasonal increases are a given, as National Association of Realtors (nar.realtor) data indicated a 3.0 percent month-over-month increase for February existing home sales and a 3.1 percent month-over-month increase in the Pending Home Sale Index (the Pending Home Sales Index is a forward-looking dataset indicating the number of homes that are under contract).  However, February sales only increased 1.1 percent from last year.  But the tell of slowing activity is the 4.1 percent decrease in pending home sales from last year.

Most experts blame the sluggish home sale activity on low housing inventory.  NAR’s reporting that February’s seasonal month-over-month 4.6 percent increase of total housing inventory is expected.  However, the 8.1 percent decrease in housing inventory compared to last year is worrisome.

The Greater Capital Area Association of Realtors (gcaar.com) March 2018 data for single family home sales in Montgomery County indicated a decline in activity across the board.  Listings decreased 11.1 percent month-over-month and 7.8 from last year.  Contracts decreased 6.6 percent month-over-month and 6.9 percent from last year.  While closings only decreased 3.8 percent month-over-month, there was a 7.8 percent decrease from last year.

Another sign that that the housing market is in crisis is last week’s announcement from Zillow.  If you have not yet heard, Zillow is expanding their Instant Offer program and plans to jump into the housing market (zillow.com).  They plan to fix and flip homes by making cash offers and buying houses like other investors who participate in their IO program. The homes will be listed for sale with real estate agents who subscribe to Zillow’s Premier Agent program, as well as select partner brokers.

Zillow Chief Marketing Officer Jeremy Wacksman stated,

“Even in today’s hot market, many sellers are stressed and searching for a more seamless way to sell their homes…They want help, and while most prefer to sell their home on the open market with an agent, some value convenience and time over price. This expansion of Instant Offers, and Zillow’s entrance into the marketplace, will help us better serve both types of consumers as well as provide an opportunity for Premier Agents to connect with sellers. This is expected to be a vibrant line of business for us and for our partners in the real estate industry, while providing homeowners with more choices and information.”

The venture into flipping is a huge deviation for the internet juggernaut, whose revenue is mostly generated by selling advertising and leads to real estate agents and loan officers.  The reaction in the industry is mixed, however Zillow’s stock dropped 7 percent the day after the announcement.  Critics, including experienced real estate investors, scoffed at Zillow’s ambitious plan to flip a house within ninety days.

In a market where home owners are reluctant to sell, and frustrated home buyers are dropping out, Zillow needs to find ways to increase lead generation to grow subscribers (see why tech models looking for alternate revenue).

While being ridiculed by many, Zillow’s flipping plan may be a brilliant strategy to generate home seller leads for agents.  Zillow acknowledges in their press release that “the vast majority of sellers who requested an Instant Offer ended up selling their home with an agent, making Instant Offers an excellent source of seller leads for Premier Agents and brokerage partners.”  If Zillow’s plan works, it could also grease the wheels of the housing market by turning reluctant home owners into sellers.

As a home seller, the home sale inventory shortage limits your competition.  But be aware that it’s not entirely a seller’s market.  Your home’s condition can significantly lower the sales price, or even prevent a sale.  Serious consideration should also be given to your listing price.  Additionally, you should focus your attention to preparing your home to show to home buyers.

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Fair housing for all

fair housing
Fair Housing (infographic from chicagorealtor.com)

Title VIII of the Civil Rights Act of 1968, better known as the Fair Housing Act turns 50 this year.  Title VIII was the culmination of a number of laws that focused on personal rights.  Personal property rights are protected in Fifth Amendment of the Constitution.  The Civil Rights Act of 1866 was enacted to specify that all citizens, regardless of race or color, were equally protected under the law, which includes property rights.  The Civil Rights Act of 1964 prohibited discrimination based on race, color, religion, sex or national origin.  The Fair Housing Act expanded the protected classes by prohibiting discrimination in the sale, rental and financing of dwellings based on race, color, national origin, religion, sex, disability and familial status (the presence of children).

Some states and localities further expand the protected classes specified in the Fair Housing Act.  For example, Maryland protects fair housing regardless of race, color, religion, sex, familial status, national origin, marital status, sexual orientation, gender identity, or disability.  Montgomery County protects fair housing regardless of race, sex, marital status, physical or mental disability, color, religion, national origin, ancestry, presence of children, source of income, sexual orientation, age and family responsibilities.

Some say we have come a long way in protecting fair housing rights.  But have we?  Even though we have come a long way to protect the rights for a number of groups, some still find it acceptable to discriminate against those who are not listed as a protected class.

It was reported last week that a home seller in Sacramento CA put her home for sale with the caveat to not sell to a Donald Trump supporter.  Some legal experts say the home seller may run into a legal challenge based on the First Amendment.  There are only a few states that include political affiliation, activity, or opinion as a protected class against discrimination.  California’s Bane Civil Rights Act includes political affiliation as a protected class against violence or the threat of violence.

Drew Bollea of CBS 13 of Sacramento (sacramento.cbslocal.com) reported that the home seller stated that she did not want to sell to a Trump supporter.  And when it was pointed out that it could possibly narrow the buyer pool by 39 percent (39 percent of Sacramento voted for the President), she said that she did not care because her point was more important than money.  She stated, “When you’re talking about principles, ethics and morals, it runs very, very deep.”

Principles, ethics and morals Indeed.  Going back to the intentions of the Civil Rights Act of 1866, the spirit of the Fair Housing Act is inclusion.  In today’s politically divisive atmosphere, there are many who would agree with the Sacramento home seller’s rationale of her discriminatory demand.  However, her excuse proclaiming “principle, ethics and morality” harken back to the rationale of discriminatory practices of the past.

April is National Fair Housing Month.  It’s ironic that while President Trump proclaimed this year’s Fair Housing Month recognizing the 50th anniversary of the enactment of the Fair Housing Act, those who voted for him are singled out.  It appears there is still much work ahead for fair housing advocates.  In his proclamation, President Trump urged “all Americans to learn more about their rights and responsibilities under the Fair Housing Act and reaffirm their commitment to making homeownership within reach, no matter one’s background.”

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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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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.