The housing market has done well for the last 18 months or so and is making a positive contribution to economic growth again. But some worry that, at least in some areas, housing prices have gone too far, too fast. The key metric for housing prices is that they can’t rise faster than incomes for an extended period. This article argues that in a few areas another year or price increases matching those of the last year will put those areas in bubble territory. I think the argument is a little overdone. Prices that are 9% or so over what some analysts say is their true value don’t make for a bubble. The article eventually makes the moderating arguments, despite the headline.
“If prices keeps going up at this rate for another six months, we will have a bubble, and people will get hurt,” Dean Baker, co-director of the Center for Economic and Policy Research recently told Bloomberg.
The housing market may or may not be approaching bubble territory, but a handful of cities have certainly seen home prices soar beyond market value, according to Trulia, a San Francisco-based real estate data company. Of the largest 100 metro areas, Orange County, Calif., appears to be the most overvalued, with prices 9% above Trulia’s estimate for fair value. Los Angeles homes are 5% overvalued, San Jose is 3%, and San Francisco real estate is 2% above fair value.
It was only in 2008 that the National Association of Home Builders started an index about homes for those ages 55 and older. Recently, the index has been very strong. The latest reading is very strong on all points. As the Baby Boomers get older, home builders are focusing on providing homes primarily for them, and the Boomers seem to be responding. At least a sizable portion of Boomers apparently don’t want to live in communities of all age groups.
This graph shows the NAHB 55+ HMI through Q1 2013. All of the readings have been low for this index, but the trend is up. Still, any reading below 50 “indicates that more builders view conditions as poor than good.”
This is going to be a key demographic for household formation over the next couple of decades, but only if the baby boomers can sell their current homes.
People move from one state to another, and they take money with them. There are a lot of anecdotes about migration within the U.S. and what causes it. But there isn’t a lot of documentation. Here’s a web site that tracks the state money flows. Consider these trends when you’re planning where to retire. But also try to analyze why people are making these moves. Is it taxes, weather, or something else. Click around the map, read the blog, and make your choices.
The residential housing market improved faster than many people expected. By now, many people are aware that home prices are higher than a year ago and are well above the lows. But there are other improvements in the market that paint a more attractive picture. Defaults rates are down. Fewer and fewer homeowners are “under water” with home worth less than their mortgages. (Though many still have home worth less than they paid for them.) As the labor market improves, these numbers also will improve. Bloomberg.com has a good review of the many changes in housing.Housing still is a long way from being healthy or resembling its peak levels, but it is improving and contributing to economic growth.
U.S. home prices climbed at the fastest pace since May 2006, rising 9.3 percent in February from a year earlier, according to an April 30 report by the S&P/Case-Shiller index of property values.
There’s a “feeding frenzy in housing” as Americans seek to take advantage of prices about 29 percent below their 2006 peak and mortgage rates near record lows, said Ross Perot Jr., 54, chairman of Dallas-based real estate company Hillwood Development Co., in a telephone interview. Perot’s father, H. Ross Perot, twice ran for president as an independent candidate.
“The big picture: this economy is coming back,” Perot said during a telephone interview from Newport Beach, California, where he was breaking ground on a condo project backed by his Dallas-based company. “The American people are very shrewd and they realize it’s a great time to borrow to buy a home because pricing is very cheap.”
The average rate for a 30-year fixed mortgage dropped to 3.35 percent last week, down from 3.84 percent a year ago as the Federal Reserve has bought $85 billion of bonds to stimulate the economy. The average 15-year rate is a record low 2.56 percent.
There are a couple of points to keep in mind about the latest new home sales data.
The first is that while they’re improving, they still are very low. New home sales are at typical recession levels. One thought to take away from that is despite the recent improvement, new home sales still are fairly dismal. The other thought to take away is that there’s a lot of potential growth to come. Even if new home sales never get near their peaks of the boom, getting back to something near the post-World War II average will be a substantial increase.
The other point is that new home sales have been artificially depressed the last few years. Home builders couldn’t compete with the low prices on distressed and foreclosed home sales. With those sales declining, new home prices are more competitive and should rise relative to existing home sales. You can see some charts and more details here.
Although there has been a large increase in the sales rate, sales are still near the lows for previous recessions. This suggest significant upside over the next few years. Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years. Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future’s so bright, I gotta wear shades.
I’ve long advised people that their homes are not investments. Over the long-term home prices don’t rise much after inflation. Here’s an interesting back-and-forth between Robert Shiller and Bill McBride about the long-term appreciation rate of U.S. homes. Shiller claims they hardly rise after inflation, while McBride says they rise closer to 1.5% annually when the proper price data are used. It doesn’t matter much which of them is right. The important point is that they both support the notion that your home shouldn’t be considered an investment. It’s a consumer good.
During the housing bubble, the difference between a slight increase in real prices (0.2% per year according to Shiller’s index) and a slightly larger increase in real prices using other indexes (probably closer to 1.5% per year) didn’t make any difference; there was obviously a huge bubble in house prices. But now it makes a difference. A key reason for the upward slope in real house prices is because some areas are land constrained, and with an increasing population, the value of land increases faster than inflation.
You might be familiar with Jim the Realtor, He’s, as you would expect, a realtor. He works in the San Diego, Calif. area. During the early stages of the real estate crash he began posting on YouTube videos of his tours of foreclosed and distressed sale homes in the San Diego area. The videos were either tragic or comical, depending on your perspective. The homes often were trashed by previous residents. Key appliances and fixtures would be removed or defaced. There were lots of other problems with the homes. Other media picked up his videos.
Now, Jim is posting videos on the bidding frenzy taking place for some homes. It’s an interesting turn of events.
Take a look at this summary of some publicity on Jim the Realtor.
Residential housing has been recovering for over a year now. You know that it’s still a long way from a boom, and prices are only modestly above the bottom.
Much of the stabilization and then rise in housing was due to investors purchasing homes as rental units. There are both data and anecdotal evidence to support that notion. Now, it appears that is changing. With fewer homeowners underwater and fewer going into default and foreclosure, there are fewer opportunities for investors to buy at deep discounts from peak prices. Strong prices increases in the worst-hit markets, such as Las Vegas and Phoenix, put a chill in investors.
Home purchases now are more likely to be made by owner-occupants instead of investors. Over the rest of 2013 we’re likely to see the number of investor purchases decline and a gradual return to the historic ratio of investors to owner-occupiers. That should result in a more stable market and an orderly increase in prices over time.
The change suggests good news. It hints that the broader housing market is normalizing, as the role of big investors in the recovery wanes. They bought so many properties that the supply of single-family homes for rent has met demand. Nationally, there were nearly 4 million more homes for rent in 2012 since the housing market last peaked in 2005. With rents softening, investors may start selling off their properties, adding to the tight supply of homes for sale, says Jed Kolko, Trulia’s economist.
So says the Mortgage Professor, Jack Guttentag, an emeritus finance professor at the Wharton School of the University of Pennsylvania. Guttentag’s main argument is that interest rates are so low that it’s a good idea to snap up the cash now. Low rates let you borrow more than you could borrow at higher rates.
Guttentag recommends taking the loan even if you don’t need the cash. You can simply establish a line of credit so the money is available in the future when you need or want it. In fact, he says the ideal strategy is to set up the largest line of credit you can now and avoid using it for as long as you can. Keep in mind you don’t qualify for a reverse mortgage unless you’re at least age 62, and using a reverse mortgage generally means your heirs will receive little or none of your home’s value.
A key factor in this calculation is the “expected interest rate.” The lower it is, the more the homeowner can borrow, and rates are quite low today.
“For example, at an expected rate of 4 percent, which has been a common rate during 2013, a senior of 62 with a home worth $300,000 can draw an initial credit line of about $174,000,” Guttentag says.”At an expected rate of 6 percent, the line drops to $140,000, and at 10 percent it falls to $54,000.” In other words, get a reverse mortgage now and you can borrow more than if you wait until rates rise, as most experts expect over the next few years.
But wait, there’s more — a second interest rate called the “accrual rate.” Like the interest rate on a regular mortgage, it is the rate charged against the loan balance. If you use the reverse mortgage to borrow a lump sum, it is a fixed rate for the life of the loan. If you take out a line of credit to draw on in the future, or select a regular monthly payment, the accrual rate is adjustable — it will rise or fall as market conditions change.
That’s the advice from Robert Shiller, economics professor and co-developer of the Case-Shiller Home Price Index. Shiller’s been cautious and skeptical about the housing recovery ever since prices seemed to have bottomed. Shiller and I agree that there are artificial drivers of the economy, especially the housing market. We didn’t fix any of the problems that caused the bubble and financial crisis. Instead, the Federal Reserve is using quantitative easing to keep interest rates low, money flowing through the economy, and a floor under most markets.
Shiller is being cautious. He isn’t calling for a collapse in housing or saying it’s in a bubble. But he’s saying that it is a possibility and that a full, real recovery in housing is some years in the future. He thinks home prices might not reach 2007 levels at least in some areas for 40 years. Shiller is more cautious and skeptical than his co-developer of the index has been.
To Shiller, the Phoenix and Las Vegas housing markets have grown incredibly fast, suggesting the recovery might be a little frothy. Both markets joined the housing bubble in 2004, he noted, only to later crash by 50 percent. Today, home prices in both cities are rising “with some exuberance,” which troubles Shiller.
Nevertheless, Shiller thinks a full housing recovery is a long way off. He thinks it could take 40 years before home prices rise to pre-2007 levels.