New Housing Bubble Coming?
Are we entering another real estate market “bubble?” Some folks I talk to believe that prices have risen too quickly and that it will all come crashing down again. Recent history will tell us that no one knows what the future holds in this regard. Pricing in the market is one factor for consideration, but the strength of the market is determined by much more. Not only can our politicians make new laws with unintended results, but major catastrophic or world economic events can affect the US real estate market. Here are some facts to help you decide where we are in the real estate cycle.
While prices have risen dramatically over the last year, they are nowhere near the highest prices that were seen just prior to the downturn. Many areas have seen 20%+ appreciation over the last year which is driven by demand. I don’t expect us to see appreciation continue at that rate over the next year because of several factors but it will be a while before we see equilibrium between supply and demand.
ALL loans available today require documentation of a buyer’s ability to repay the loan. Lenders require much more information from buyers today before approving a loan. Long gone are the stated income loans (aka: liar loans) that allowed buyers to merely pull numbers out of a hat to qualify for a home loan (of course, that doesn’t mean they won’t come back). When I was VP of Sales for Lennar’s Northern California Division, I can’t tell you how many times buyers made loan applications with our “in-house” lender and were declined; only to have the buyer return with a stated income loan approval from another lender. Hmmm, let me see; did their income go up in just few short days? The point is that loans originated today are more sound and more likely to be repaid than in the past.
Most local market areas have 1.5- 2.0 month’s supply of inventory of homes for sale. A market in equilibrium between supply and demand will have 3-6 months of inventory available at any time. In other words, if there were no additional homes placed on the market for sale, it would take 3-6 months to sell everything that was currently available. We are seeing a trend toward equilibrium but we are still in a seller’s market and it will likely be several months before supply and demand are equal.
Short sales and foreclosures as a percentage of total sales are way down. These sales tend to sell at lower prices. So one reason that median price has increased is merely because there are fewer short and foreclosure sales in the market. In addition, this demonstrates that the market is building real strength.
Interest rates are up 1% or more since the beginning of the summer. This will tend to push home sales toward equilibrium in a seller’s market. Rates will likely creep up over the next 12 months, however, it is expected that rates will stay relatively low compared to historic highs.
While short and foreclosures sales are down, traditional sales are up. Why? Because the price increases we have seen in the market allow homeowners to sell their homes without credit impairment and in some cases, actually making a few bucks along the way. And most of these sellers will be new buyers in the market.
While there are many external factors that can affect the stability and strength of the real estate market, there is no evidence, at this time, that would lead us to believe we are in a “bubble” or even close to being there. As more inventory comes into the market, the rate of home price appreciation is slowing yet demand is still strong. Barring unforeseen circumstances, there is every reason to believe that we are headed toward a more stable market with reasonable price appreciation and inventory. In other words, we are heading in the direction of equilibrium, not of another crash.
Better Homes and Gardens Real Estate