[caption id="" align="alignnone" width="648"] Housing Bubble[/caption] A recent report by CoreLogic revealed that U.S. home values appreciated by more than 37% over the last five years. Some are concerned that this is evidence we may be on the verge of another housing “boom & bust” like the one we experienced from 2006-2008. Recently, several housing experts weighed in on the subject to alleviate these fears.
Sean Becketti, Freddie Mac Chief Economist
“The evidence indicates there currently is no house price bubble in the U.S., despite the rapid increase of house prices over the last five years.”
Edward Golding, a Senior Fellow at the Urban Institute’s Housing Finance Policy Center
“There is not likely to be a national bubble in the way that we saw the first decade of the century.”
Christopher Thornberg, Partner at Beacon Economics
“There is no direct or indirect sign of any kind of bubble.”
Bill McBride, Calculated Risk
“I wouldn’t call house prices a bubble.”
David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices
“Housing is not repeating the bubble period of 2000-2006.”A recent article by Teo Nicolais, a real estate entrepreneur who teaches courses on real estate principles, markets, and finance at Harvard Extension School concluded that the next housing bubble may not occur until 2024. The article, How to Use Real Estate Trends to Predict the Next Housing Bubble, looks at previous peaks in real estate values going all the way back to 1818. Nicolais uses the research of several economists. The article details the four phases of a real estate cycle and what defines each phase. Nicolais concluded his article by saying:
“Those who study the financial crisis of 2008 will (we hope) always be weary of the next major crash. If George, Harrison, and Foldvary are right, however, that won’t happen until after the next peak around 2024. Between now and then, aside from the occasional slow down and inevitable market hiccups, the real estate industry is likely to enjoy a long period of expansion.”
Bottom LineThe reason for the price appreciation we are seeing is an imbalance between supply and demand for housing. This has created a natural increase in values, not a bubble in prices. Contact me if you'd like to see research of home prices in your town!
The economists at CoreLogic recently released a special report entitled, Evaluating the Housing Market Since the Great Recession. The goal of the report was to look at economic recovery since the Great Recession of December 2007 through June 2009. One of the key indicators used in the report to determine the health of the housing market was home price appreciation. CoreLogic focused on appreciation from December 2012 to December 2017 to show how prices over the last five years have fared. Frank Nothaft, Chief Economist at CoreLogic, commented on the importance of breaking out the data by state,
“Homeowners in the United States experienced a run-up in prices from the early 2000s to 2006, and then saw the trend reverse with steady declines through 2011. After finally reaching bottom in 2011, home prices began a slow rise back to where we are now. Greater demand and lower supply – as well as booming job markets – have given some of the hardest-hit housing markets a boost in home prices. Yet, many are still not back to pre-crash levels.”The map below was created to show the 5-year appreciation from December 2012 – December 2017 by state. Nationally, the cumulative home price appreciation over the five-year period was 37.4%, with a high of 66% in Nevada, and a modest increase of 5% in Connecticut.
Where were prices expected to go?Every quarter, Pulsenomics surveys a nationwide panel of over 100 economists, real estate experts, and investment and market strategists and asks them to project how residential home prices will appreciate over the next five years for their Home Price Expectation Survey (HPES). National homes prices were projected to increase cumulatively by 23.1% by December 2017, according to the December 2012 survey results. The bulls of the group predicted home prices to rise by 33.6%, while the more cautious bears predicted an appreciation of 11.2%.
Where are prices headed in the next 5 years?Home prices are expected to increase by 18.2% over the next 5 years according to data from the most recent HPES. The bulls of the group predict home prices to rise by 27.4%, while the more cautious bears predict an appreciation of 8.3%.
Bottom LineEvery day, thousands of homeowners regain positive equity in their homes. Some homeowners are now experiencing values even higher than before the Great Recession. If you’re wondering if you have enough equity to sell your house and move on to your dream home, stop wondering! Let’s get together to discuss conditions in your neighborhood!
- Buyer demand continues to outpace the supply of homes for sale which means that buyers are often competing with one another for the few listings that are available!
- Housing inventory is still under the 6-month supply needed to sustain a normal housing market.
- Perhaps the time has come for you and your family to move on and start living the life you desire.
[caption id="" align="alignnone" width="648"] Are Home Values Really Overinflated[/caption] Last week, the National Association of Realtors (NAR) released their most recent Existing Home Sales Report. According to the report:
“The median existing-home price for all housing types in January was $240,500, up 5.8 percent from January 2017 ($227,300). January’s price increase marks the 71st straight month of year-over-year gains.”Seventy-one consecutive months of price increases may have some concerned that current home values may be overinflated. However, at the same time, Zillow issued a press release which revealed:
“If the housing bubble and bust had not happened, and home values had instead appreciated at a steady pace, the median home value would be higher than its current value.”Here are two graphs that help show why home prices are exactly where they should be. The first graph shows actual median home sales prices from 2000 through 2017. [caption id="attachment_37136" align="alignnone" width="650"] Are Home Values Really Overinflated[/caption] By itself, this graph could heighten concerns as it shows home values rose in the early 2000s, came tumbling down and are now headed up again. It gives the feel of a rollercoaster ride that is about to take another turn downward. However, if we also include where prices would naturally be, had there not been a boom & bust, we see a different story. The blue bars on this graph represent were prices would be if they had increased by the normal annual appreciation rate (3.6%). By adding 3.6% to the actual 2000 price and repeating that for each subsequent year, we can see that prices were overvalued during the boom, undervalued during the bust, and a little bit LOWER than where they should be right now.
Bottom LineBased on historic appreciation levels, we should be very comfortable that current home values are not overinflated.
Now is a great time to sell!We all realize that the best time to sell anything is when demand for that item is high, and the supply of that item is limited. Two major reports released by the National Association of Realtors (NAR) revealed information that suggests that now is a great time to sell your house. Let’s look at the data covered in the latest REALTORS® Confidence Index and Existing Home Sales Report.
REALTORS® CONFIDENCE INDEXEvery month, NAR surveys “over 50,000 real estate practitioners about their expectations for home sales, prices and market conditions.” This month, the index showed (again) that homebuying demand continued to outpace the supply of homes available in January. The map below illustrates buyer demand broken down by state (the darker your state, the stronger demand there is). In addition to revealing high demand, the index also shows that compared to conditions in the same month last year, seller traffic conditions were ‘weak’ in 22 states, ‘stable’ in 25 states, and ‘strong’ in only 4 states (Alaska, Nevada, North Dakota & Utah). Takeaway: Demand for housing continues to be strong but supply is struggling to keep up, and this trend is likely to continue throughout 2018.
THE EXISTING HOME SALES REPORTThe most important data revealed in the report was not sales but was instead the inventory of homes for sale (supply). The report explained:
- Total housing inventory rose 4.1% from December to 1.52 million homes available for sale.
- Unsold inventory is 9.5% lower than a year ago, marking the 32nd consecutive month with year-over-year declines.
- This represents a 3.4-month supply at the current sales pace.
“Another month of solid price gains underlines this ongoing trend of strong demand and weak supply. The underproduction of single-family homes over the last decade has played a predominant role in the current inventory crisis that is weighing on affordability.”In real estate, there is a guideline that often applies; when there is less than a 6-month supply of inventory available, we are in a seller’s market and we will see appreciation. Between 6-7 months is a neutral market, where prices will increase at the rate of inflation. More than a 7-month supply means we are in a buyer’s market and should expect depreciation in home values. As we mentioned before, there is currently a 3.4-month supply and houses are going under contract fast. The Existing Home Sales Report shows that 43% of properties were on the market for less than a month when sold. In January, properties sold nationally were typically on the market for 42 days. As Yun notes, this will continue unless more listings come to the market.
“While the good news is that Realtors in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”Takeaway: Inventory of homes for sale is well below the 6-month supply needed for a normal market. Supply will ‘fail to catch up with demand’ if a ‘sizable’ supply does not enter the market.
Bottom LineNow is the time to take advantage of the ready, willing and able buyers that are out searching for houses.
- Atlas Van Lines recently released the results of their annual Migration Patterns Survey in which they tracked their customer’s movement from state-to-state over the course of 2017.
- Idaho held on to the top spot of ‘high inbound’ states for the 2nd year in a row followed by Washington.
- The ‘outbound’ states seem to draw a line straight across the country from Connecticut to Wyoming.
Home Prices are Increasing!There are many unsubstantiated theories as to why home prices are increasing. From those who are worried that lending standards are again becoming too lenient (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of “irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion. However, the increase in prices is easily explained by the theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase. It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate (see chart 1). According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes has been below six months for the last four years (see chart 2).
Bottom LineIf buyer demand outpaces the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.
- The inventory of existing homes for sale has dropped year-over-year for the last 29 consecutive months and is now at a 3.9-month supply.
- Existing home sales are currently at an annual pace of 5.48 million, the highest pace since June of this year, but down 0.9% from October 2016.
- NAR’s Chief Economist, Lawrence Yun, had this to say: “While the housing market gained a little more momentum last month, sales are still below year ago levels because low inventory is limiting choices for prospective buyers and keeping price growth elevated.”
[caption id="" align="alignnone" width="648"] Too Easy to get a mortgage[/caption] There is little doubt that it is easier to get a home mortgage today than it was last year. The Mortgage Credit Availability Index (MCAI), published by the Mortgage Bankers Association, shows that mortgage credit has become more available in each of the last several years. In fact, in just the last year:
- More buyers are putting less than 20% down to purchase a home
- The average credit score on closed mortgages is lower
- More low-down-payment programs have been introduced
“Measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates … it is easier to get a loan.”Here is a graph showing their findings: Again, today’s lending standards are nowhere near the levels of the boom years. As a matter of fact, they are more stringent than they were even before the boom.
Bottom LineIt is getting easier to gain financing for a home purchase. However, we are not seeing the irresponsible lending that caused the housing crisis.
With residential home prices continuing to appreciate at levels above historic norms, some are questioning if we are heading toward another housing bubble (and subsequent burst) like the one we experienced in 2006-2008. Recently, five housing experts weighed in on the question.
Rick Sharga, Executive VP at Ten-X:
“We’re definitely not in a bubble.” “We have a handful of markets that are frothy and probably have hit an affordability wall of sorts but…while prices nominally have surpassed the 2006 peak, we’re not talking about 2006 dollars.”
Christopher Thornberg, Partner at Beacon Economics:
“There is no direct or indirect sign of any kind of bubble.” “Steady as she goes. Prices continue to rise. Sales roughly flat.…Overall this market is in an almost boring place.”
Bill McBride, Calculated Risk:
“I wouldn’t call house prices a bubble.” “So prices may be a little overvalued, but there is little speculation and I don’t expect house prices to decline nationally like during the bust.”
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices:
“Housing is not repeating the bubble period of 2000-2006.” “…price increases vary unlike the earlier period when rising prices were almost universal; the number of homes sold annually is 20% less today than in the earlier period and the months’ supply is declining, not surging.”
Bing Bai & Edward Golding, Urban Institute:
“We are not in a bubble and nowhere near the situation preceding the 2008 housing crisis.” “Despite recent increases, house prices remain affordable by historical standards, suggesting that home prices are tracking a broader economic expansion.”