Housing bubble countdown

Housing Bubble
Cycle of housing bubble (infographic from estate123.com)

The March S&P/Case-Shiller U.S. National Home Price Index (spindices.com) was announced May 31st 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.

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.

real estate bubbleThe 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.

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Home pricing strategy and housing market shift

Home pricing strategy
Home pricing strategy (from California Association of Realtors® www.car.org)

Home sellers should be concerned about the reports of a tumbling luxury home market, and consider changing their home pricing strategy.  The stalwart of the American real estate market since the recession (and possibly skewing home price indices) is showing signs of weakness.  Leigh Kamping-Carder of the The Wall Street Journal reported that 50% more homes priced $5 million or more reduced prices during this past January, compared to January 2015 (More Luxury-Home Sellers Drop Their Asking Prices; wsj.com; April 12, 2016).  Additionally, Kelsey Ramírez reported for HousingWire about a Redfin home price analysis that indicated weakened luxury home prices; the sector realized a 1.1% annual decrease during the first quarter of 2016 (Luxury home prices decrease for first time since 2012; housingwire.com; May3, 2016).

The apparent luxury home market collapse is most likely due to an increased inventory of luxury homes, and a lack of foreign investors (who were active in the market several years ago).  The impact of reduced prices is noticeable in home price indices as well, as there seems to be a consensus that there is a hint of a slowdown of price appreciation.

Corelogic’s May Home Price Insights (corelogic.com) indicated that nationwide home prices during March increased 6.7% year over year; and projects 5.7% appreciation for next March.  Additionally, the report highlights twelve states that have reached new home price highs.  Month over month average home prices nationwide increased 2.1%; however next month’s projection is for a gain of only 0.7%.

April’s S&P/Case-Shiller National Home Price Index (spindices.com) indicted that February home prices increased at an annual rate of 5.3%, which is roughly the same as the previous month’s index.  The hot real estate markets of Portland, Seattle, and Denver realized the highest year over year gains, growing at 11.9%, 11% and 9.7% respectively. However, the national 0.2% month over month gain was not as encouraging.

David Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices, provided commentary about the April S&P/Case-Shiller report, saying “…Home prices continue to rise twice as fast as inflation, but the pace is easing off in the most recent numbers…While financing is not an issue for home buyers, rising prices are a concern in many parts of the country. The visible supply of homes on the market is low at 4.8 months in the last report. Homeowners looking to sell their house and trade up to a larger house or a more desirable location are concerned with finding that new house. Additionally, the pace of new single family home construction and sales has not completely recovered from the recession.”

Although the recent home price indices have not yet established negative trends, they are telling of a housing market under pressure.  Local home sellers should take note that the S&P/Case Shiller Home Price Index for the Washington DC metro area indicates a month over month -0.2% (negative two tenths of a percent) change in the average home price.  The Corelogic HPI Market Condition Indicator for the Washington DC-MD-VA-WV metro area is “Overvalued.”

If you are planning a home sale during the latter half of this year, you should be extra aware of the local market trends; paying attention to competition and general inventory.  Home pricing strategies that were common last year may not work to your advantage.  Over pricing your home could result in driving home buyers to your competition, rather than netting a higher sales price.

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Home pricing strategies focal point of 2016 housing market

2016 housing market hinges on home prices.

A home selling season has not been anticipated so much by home sellers since 2013. It’s not that 2015 was a bad year for housing, because it wasn’t. It’s that many home owners who have been wanting to sell since 2010 (some because of being underwater) may be in position to make the long awaited move.

Home Prices
CoreLogic HPI (from corelogic.com)

A central reason for the reanimation of the housing market is, of course, home prices. Several major indices concur that home prices have made significant improvements through 2015. S&P/Case-Shiller U.S. National Home Price Index (spindices.com) reported a 5.2% annual increase in October, while the FHFA House Price Index (fhfa.gov) revealed a 6.1% year over year increase in October. November’s CoreLogic HPI (corelogic.com) indicated a 6.2% year over year increase and project a 5.4% year over year home price increase next November. And as much as home values had healthy gains nationwide, the local Washington DC metro region’s home annual price increases were more modest: 3.1% according to CoreLogic, and about 1.7% according to S&P/Case-Shiller.

home equity
US Home Equity Report (from corelogic.com)

Although negative equity continues to burden many home owners, the good news is that the number of underwater homes is decreasing. Although home prices continue to edge higher throughout the nation, there are many who are still underwater. According to CoreLogic’s Equity Report Q3 2015 (corelogic.com), 256,000 homes regained equity. And although 92% of mortgaged homes now have equity, about 4.1 million homes continue to be underwater. 17.6% of mortgaged homes are considered “under-equitied” (less than 20% equity), while 2.2% are “near negative equity” (less than 5% equity). 29.3% of underwater homes in the US are located in five states: Nevada, Florida, Arizona, Rhode Island, and Maryland. While 87.9% of Maryland mortgaged homes have equity, 95.5% of mortgage homes in Washington DC have equity. However, the local Washington DC metro region (DC – VA – MD) records 89.2% of mortgaged homes with equity – leaving about 10.8% of mortgaged homes underwater.

If you’re selling your home this spring, you want to capitalize the market. Although you want to benefit from the current low inventory; realize that by late spring, the housing market gets into full swing and inventory surges while your competition intensifies. Also consider the home buyer: many consider themselves savvy consumers who are money conscious and more fiscally responsible than their 2006 counterparts. Most home buyers want homes that have new or recent updates, including systems (such as HVAC and roof). There are few who are willing to make repairs or upgrade homes they are moving into; much less budget for a new roof or furnace in the first years of home ownership.

Real EstateThe sensible way to make the most of your sale is to have a plan, and pricing your home correctly should be the focal point. Don’t fall into the trap of pricing your home by comparing national price increases or worse yet – media reports of hot markets. Real estate is a local phenomenon and you should collect data within your neighborhood (the closer to your home the better). Your real estate agent should be able to produce a detailed market analysis and explain how the comps vary and correspond with each other and to your home. Consider your home’s condition and amenities. You may have to adjust your price if your home is in need “TLC.” However, updates to the kitchen, bathrooms, windows, roof, flooring, and HVAC not only add appeal but also add value.

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Real estate year in review 2015

home prices
How will Home Prices do in 2016? (from WinningAgent101.com)

2015 could have been considered a “damn if you do and damn if you don’t” year for the Fed. The Fed is often criticized (sometimes harshly) for their action and inaction. And as the historic run of near zero interest rates ended this year, many criticized the Fed for waiting too long to raise interest rates, while others said it was still too soon. The full impact of the first Fed rate hike in nine years won’t be known well into the next year.

Another real estate milestone that occurred this year was the implementation of the TRID (TILA-RESPA Integrated Disclosure) rule. Although the Consumer Finance Protection Bureau decided to delay enactment once; the decision to put the rule in effect in October was not only significant, but a historic change to the real estate settlement process. Initially, there was mixed reception; some lenders indicated that they have transitioned smoothly, while others reported having difficulty. Even Congress attempted to provide a grace period for those still transitioning (Homebuyers Assistance Act, H.R. 3192). Like the Fed’s rate increase, the full effect of TRID on consumers and the industry won’t be realized until next year.

HomeEven though the 2015 housing market started slowly, because of record cold weather; the market demonstrated its resiliency with increased sales and continued home price growth throughout the year. Some markets were on fire this year; such as the Seattle WA region, where multiple offers and single digit days on market were the norm and home price indices exceeded the national average. However, most other regions (such as the Washington DC region) experienced average growth. The lack of inventory in some markets was said to add pressure on price growth. Home sale growth is expected to continue in 2016, as housing formation and employment outlooks are brighter. While home prices are still below the 2006 peak, home prices are expected to increase with a market expansion. And as housing affordability decreases, some housing critics are clamoring to predict another housing bubble.

San Francisco CA was one of 2015’s hottest markets. The market was so heated that many described it as “insane.” Madeline Stone reported that San Francisco teardowns sold for well above $1M while resales typically sold for 70% above list price (San Francisco real estate has gotten so crazy that this startup founder was offered stock options for his house; businessinsider.com; March 31, 2015).

And of course, there is the notable sale of a 765sf two-bedroom home that sold for $408,000 earlier this year (17% over list price). The significance of the 100-year-old San Francisco home is that it was described as a “shack” and needed much more than TLC (Daniel Goldstein; San Francisco earthquake shack sells for $408,000; marketwatch.com; October 22, 2015).

And what can be more proof that the real estate market has been recovering (at least for those who can afford it) than the world’s priciest home sale. Patrick Gower, Francois De Beaupuy , and Devon Pendleton reported on December 15th (This $301 Million Paris Chateau Is the World’s Priciest Home; bloomburg.com) about the sale of Chateau Louis XIV for €257Million (approximately $301Million); a private sale to a Middle Eastern buyer. Located in a 56-acre park, the recently built Paris estate is said to have taken three years to build. Amenities include an aquarium, cinema and a wine cellar, and a gold-leaf fountain.

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Hot regional housing markets change reliance on MLS listings

HomesGood news for home sellers, in most US regions. Tuesday’s news release from S&P/Case-Shiller Home Price Indices indicates a nationwide home price gain. The 10-city and 20-city composites continue to show home price gains, as the composites realized a 4.7% and 5.0% year over year gain respectively (month over month gains were 0.8% and 0.9% respectively). The nearby Washington DC region was not as robust as the other US regions in the composite, however, as home prices gained about 1% year over year and about 0.8% month over month (us.spindices.com).

The S&P/Case-Shiller index seems to be in agreement with the U.S. House Price Index Report issued by the Federal Housing Finance Agency (fhfa.gov), which indicated that national home prices gained 1.3% during the first quarter of 2015. However here in Maryland, home prices did not fare as well with a 0.38% decline year over year.

Hot markets in western regions of the US, such as Washington, are making news besides strong home prices. In one of the hottest markets in the nation, a Seattle Washington broker has decided to drop out of their MLS. Counter intuitive to the idea of maximizing listing exposure, Rob Smith of the Puget Sound Business Journal reported that Quill Realty is dropping out of their local MLS (Here’s why this Seattle realty company just ditched the MLS; bizjournals.com, May 18, 2015).

Instead of MLS placement, Quill intends to place listings on a number of websites, including Zillow, Redfin, and Realtor.com. The rationale is that sellers will save money from the 1% commission that is charged by Quill; while buyers of Quill’s listings “… will become responsible for working out a financial arrangement with their own broker.”

Of course, this is not an entirely new idea. There have been a number of seller oriented business models that have been devised over the years; with new variations popping up during hot markets. Many discount brokers and MLS placement services, which have survived the housing downturn, have continued to market their business model successfully.

Innovative or not, hot markets tend to make brokers become more protective of their listings by seeking ways to make them proprietary. Low housing inventory in some markets, along with increasing home prices and buyer competition can make a home listing a hot commodity. I will remind of the recent report indicating that pocket listings are on the rise. Pocket listings are listings kept out of the MLS and shown only to a select network of contacts and clients. And although pocket listings are often associated with luxury real estate, pocket listings in hot markets can occur across all price ranges because of the increased home buyer competition.

In response to recent trends, several regional Realtor® groups and brokers have been formulating a nationwide consumer MLS to provide the consumer with up to date relevant information (brokerpublicportal.com). Board member of the Broker Public Portal, Robert Moline (Home Services America) stated, “There is a tremendous amount of support and momentum throughout the MLS and brokerage communities to create a new choice for how and where to display their listings…”

And even though many home sellers are taking advantage of a seller’s market in their respective markets, home buyers are becoming increasingly resourceful as well. Many buyers are learning how to find home for sale in places other the MLS. Besides alternative listing websites, many buyers are also relying on neighborhood listservs (internet email lists) and internet groups for home sale notifications.

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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.