Are we in another real estate bubble?

medium_2264987865Are we in another real estate bubble?  People ask me some really difficult questions, and this is one requires a lengthy answer.

The answer is:  Not Yet, I think. – It depends who you ask and it depends on what you consider over-inflated housing prices…

There are a lot of people questioning this right now with good reason.  First of all, we all experienced a very painful real estate market correction so the pain is fresh in our minds.  Also, many of us all understand that something isn’t quite right about this recovery but can’t quite place our fingers on exactly what it is.

A healthy real estate market is a balanced supply and demand ratio driven by economic growth and job growth.  This recovery seems to have bypassed that and gone straight from ridiculous levels of over-supply to extreme demand overnight.  Economic and and job growth seem to be no where on the horizon.

While it may seem magical, there were forces at work behind the scenes.

The Fed had been ‘tinkering’ with the markets since 2008 with different attempts to influence the stock market and interest rates.  The super low interest rates we have been seeing is a result of those actions.

Below is a chart I quickly put together, it isn’t exactly pretty but it shows the Twin Cities Median Sales Price of homes over the last 10 years and the average 30 year fixed rate mortgages with indications on Fed Action dates.

 

10132013 Twin Cities Median Sales Price vs fed action and interest rates

 

The Fed action dates I pulled from Calculated Risk blog.

• November 25, 2008Press Release: $100 Billion GSE direct obligations, $500 billion in MBS

• December 16, 2008 FOMC Statement: Evaluating benefits of purchasing longer-term Treasury Securities

• January 28, 2009FOMC Statement: FOMC Stands Ready to expand program.

• March 18, 2009FOMC Statement: Expand MBS program to $1.25 trillion, buy up to $300 billion of longer-term Treasury securities

• March 31, 2010: QE1 purchases were completed at the end of Q1 2010.

• August 27, 2010: Fed Chairman Ben Bernanke hints at QE2: Analysis: Bernanke paves the way for QE2

• November 3, 2010FOMC Statement: $600 Billion QE2 announced.

• June 30, 2011: QE2 purchases were completed at the end of Q2 2011.

• September 21, 2011“Operation Twist” announced. “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.”

• June 20, 2012“Operation Twist” extended. “The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities.”

Read more at http://www.calculatedriskblog.com/2012/06/qe-timeline.html#QTWbv1zxCsRe5l3K.99

(check his chart out as he shows these dates and the S&P 500)

Quantitative Easing and Operation Twist seem to have been the catalysts that spurred on the low interest rates which is driving the sellers market.  While this has has spurred life into a fledgling real estate market, the longer term impacts are yet to be seen.

So what happens when interest rates go back up?  Will a $300,000 home still be worth $300,00, or will the price have to drop to accommodate for the change in mortgage payments?  The answer will depend on the job growth…

How will the markets correct when the Fed stops injecting money into it?  Will it drive the bonds to record high rates which will bring mortgage rates sky high or will it be a gradual transition?

While there are some pretty big unknowns in my mind about this resurgence in the housing market, I do believe it is still a good time to purchase real estate taking advantage of these low interest rates.  I personally like the asset based investment, especially since I need to live somewhere anyhow – why rent?  I also like it because historically home values have paced inflation, and we may see inflation from all this Fed stimulus!

My recommendations when buying now are:

  1.  Make sure Rents support the value of the home you are buying. (this is ultimately the true value of a property.)
  2.  Be conservative, don’t take on more debt than you can really afford.

If you are concerned about these 2 fundamentals, then maybe you might listen to Nobel Prize winning economist and creator of the Case Shiller Index, Robert Shiller:

Nobel prize winner warns of ‘bubbly’ home prices

….Bubbles are created when investors fail to recognize when rising asset prices become detached from underlying fundamentals….

Shiller and other economists warn that prices in some markets have risen too far, too fast due to the Fed’s ultra-easy monetary policy.

Read Article from CNBC October 14, 2013

 

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photo credit: The Consumerist via photopin cc

Housing Inventory: On the Rise?

There is some concern that the housing inventory is beginning to climb in some markets and that this may spread into other markets.

Bill McBride from Calculated Risk posted on this year over year increase.

We are starting to see more and more local areas report year-over-year increases in inventory. Housing economist Tom Lawler frequently sends out data on different areas across the country. In today’s note, Lawler wrote:
Read more at Calculated Risk

His post made me curious on what may be in store for our marketplace.   The Twin Cities housing market is still showing year over year decline in inventory.

09082013 Homes for Sale

New Listings are beginning to show something interesting.  +16.4% year over year increase in New Listings.  Currently the market can handle the added inventory, and arguably needs this inventory badly.  At this point I am not overly concerned, but there are a lot of dynamics at play and we have seen how quickly these markets can turn.

09072013 New Listings

Here are the year over year Pending Sales.  The Twin Cities is showing a +10.6% year over year increase in Pending Sales.   As long as this figure continues to improve, the market can handle a lot more inventory.  One thing is certain, the housing market is always in flux…

09082013 Pending Sales

 

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Inventory Shortage, what I meant to say…

I did a post here concerning NAR’s housing report that they were concerned the shortage of inventory would hurt the housing market.  I touched on some the reasons I disagreed.

Then Aaron Dickenson smashes this post out of the ballpark…

this is what I meant to say!

5 Ways Low Inventory Will Save The Housing Market

Well worth the read….

(Great post Aaron – wish I could have been as articulate and concise!)

 

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Housing Shortage, Vacancies and Price Increases

With the market continuing to erode the inventory of homes for sale, we are beginning to see signs of housing shortages.  With low inventory comes higher prices.

I am beginning to notice this topic come up more and more and thought I would share a couple articles.

There are some pretty big wild cards in the “housing market” deck yet including the shadow inventory, Europe Debt Crisis, and unknown impacts of new regulations, so who knows.   Assuming the market continues on its current path then   I do agree we will see pricing increase, and 10% is not out of the question.

Fox News:

The National Association of Realtors’ official forecast says home prices will rise about 3% to 5% this year and next year. But based on recent trends, NAR’s chief economist, Lawrence Yun, says rising prices could surprise many in coming months.

“I would not be surprised if prices went up 10%,” he says.
Read more: http://www.foxbusiness.com/personal-finance/2012/07/16/five-mortgage-and-housing-trends-in-summer-2012/#ixzz220ojKPtg

Builder Magazine:

More evidence that a shortage in available housing is looming was found in the Census Bureau’s release on Friday of its quarterly estimates for residential vacancies and homeownership.

Read more: http://www.builderonline.com/housing-data/vacancy-rates-continued-to-dip-in-the-second-quarter.aspx?rssLink=Vacancy+Rates+Continued+to+Dip+in+the+Second+Quarter

 

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Twin Cities Weekly Real Estate Market Update June 25th 2012

Minneapolis Area Association of Realtors Weekly report shows continued improvement.   I am watching the inventory levels closely because this     determines if their is need for more housing units to be added to the supply.

As we move through the summer months, historically fewer new listings will hit the market.  If that happens, we could be looking at a serious shortage of housing units.   It is hard to believe…

In the Twin Cities region, for the week ending June 16:
• New Listings decreased 3.7% to 1,476
• Pending Sales increased 19.8% to 1,173
• Inventory decreased 31.0% to 17,517

Read Full Report from MAAR

 

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Building your dream home

Have you dreamed about building your dream home?  Now might be the time you should do it.   The home inventory is way down, and what is available on the market is lacking for the most part.   There is a surplus of buildable lots on the market at huge discounts still, and mortgage rates at historic lows.

Once the supply of these bank owned lots is gone, that is it…  Any new supply of lots will be at much higher prices to cover the costs of subdividing and improving the lots.  This inventory is priced way below replacement value.

Contact me if you are interested in seeing this supply of bank owned lots.

If you have built before or if you have dreamed about building, you will like this short clip from Mr. Blandings Builds His Dream Home.  Classics are classics for a reason! …some things never change!

 

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