xmlns:og='http://ogp.me/ns#' Are Real Estate bubble conditions possible? ~ The Prepared Guy

Friday, June 19, 2015

Are Real Estate bubble conditions possible?

I feel that I yet again have to give my response to another NAR (National Association of Realtors) video of whether or not a bubble in real estate currently exists.  If you do not wish to continue to read on my answer is Yes.  I believe that we are currently in another real estate bubble not only throughout much of the US of A but also here in Utah.

http://www.realtor.org/videos/april-pending-home-sales-up-34?om_rid=AAOHHR&om_mid=_BVcLekB9CMk8rB&om_ntype=NARWeekly

The NAR does not believe that we are in a bubble nor that there is any inflation.  Allow me to prove to you otherwise.

First, I hope that we all realize that the real estate market collapse of , I'll call it 2008+, was a result of a combination of problems including 'loose' lending regulation and loan and appraisal fraud which helped to fuel bubble conditions.

According the NAR's own data the price of existing homes from 1968 to 2009 had gone up consistently by approximately 3.7% annually.  The US govt. tells us that appreciation during this time was 4.5%.  According to the Case-Schiller index this price increase was 3.4% between 1987 and 2009 with an inflation rate of 2.9%.   When the rate of appreciation exceeds the rate of inflation people get quickly priced out of being able to afford a home.  Mr. Yun in this video tells us that home values have gone up by 8 - 9% over the previous year which he does admit is "too strong", especially since incomes are only rising by 2%.  There is obviously a problem here.

I'm not an economist nor have a degree in any other related field but I do have a degree in common sense.  The value of a home is only as much as a buyer is willing and able to pay or finance.  So, take these conditions into consideration before you decide if we are in a bubble again or not.

Back then, long term interest rates for a 30 year mortgage were at 6%+, now they are closer to 4%.  Since the financial crash home values have nearly 'recovered' (in my estimation) to the same insanely high levels.  I also understand that in some specific areas and markets of the country real estate prices have eclipsed the levels of those days.

The reason our interest rates are so low is because our 'economy' is so weak.  Low interest rates are meant to stimulate borrowing and spending to boost the economy.  If it was true that our economy is strengthening then why hasn't the Fed raised interest rates yet?

How much less of a home can you afford to buy when interest rates are 2% higher.  About 20% less.   That's considerable!  If a home were worth $250k in 2008 at 6% interest what should it be worth today at 4% interest?  Home value is inextricably tied to mortgage interest rates as most people in most any price range must get a loan to purchase a home.  If you can afford a $250k home at 6% you could also afford a $300k home at 4% interest.  For home prices to recover to almost the same point they were in 2008 the interest rate had to drop two points.  The home is more affordable for the buyer because the purchase price and interest rate have dropped which equals a lower payment. That is a good thing for now but it is not a good indicator as to where property values are.  Ask yourself this question; If interest rates were two percent higher right now would home prices be as high as they currently are?  The correct answer is No, they would be much lower.  As Mr. Yun says in the video, interest rates can not remain at these exceptionally low rates, that these are "special conditions".  I completely agree.  Although I believe that the Fed can not raise rates without hurting the economy, the market itself (economic mother nature as it may be called) will eventually cause them to rise regardless.

Mr. Yun indicated that incomes have risen by 2% since 2008 and that the job market is recovering.  Both of these statements are untrue.  The government produces whatever data serves their purpose and the NAR obviously believes and uses this data.  The web site shadowstats.com tracks real numbers whereas the government excludes and includes whatever data they need to achieve their purpose.  According to shadow stats.com true unemployment rate is over 20% and inflation is between 8% and 10%.  It is a fact that there are more people unemployed right now than during the great depression and the labor force participation rate is at nearly a 40 year low.  The Baltic Dry Index is at an all time low and so is the China Containerized Freight Index.  There are many more interesting data points that prove that we are much worse off now than before the previous collapse.  Not to mention the increase in world wide debt by at least $57 Trillion.  While it appears that many jobs have been added to the economy the vast majority of these jobs are part time jobs with no benefits which took the place of quality full time jobs with benefits.  Does this sound like a job market that is recovering Mr. Yun?  Do we take the government at its word or should we do our own research?












Mr. Yun also states that credit requirements for getting a home loan have tightened up which, compared to before the crisis is true.  However, Fannie May and Freddy Mac continue to loosen their policies and have made both 0%  and 3% down loans available just like before.  Variable rate (ARM) loans are also back and credit score requirements have dropped significantly as well.

He also states that currently there are more all-cash home purchases than before.  While this I am sure is true we need to look at where this cash is coming from.  Could it possibly be coming from the American people who are worse off today than 7 years ago?  I don't think so.  It is my speculation that this cash is coming back home to roost.  Foreigners holding US dollars see the danger that the US economy is in and are spending their US dollars as fast as they can, while the dollar is strong, to acquire real property as well as other real assets.  This is yet another consequence, in addition to lost multinational corporation profits, we are seeing from the surge in the dollar compared to other currencies.  How many people do you know that have paid cash for their new home recently?  This surge in all-cash home purchases is that cash coming back into the US economy from foreign markets and it is causing inflation.

Mr. Yun states that there is virtually no inflation but he also says that home values rose by 8 to 9 percent over the last year.  Is this not a definition of inflation itself?  According to his data, with income rising only 2% and virtually no inflation this shows that home pricing is out of 'whack'.  Home builders have been raising their prices because their homes are selling too fast at lower prices. I'd say that's a sign of inflation too.

I am not sure that Mr. Yun's statement that bringing additional supply into the market would help to ease the pressure of rising prices is correct.  The only way I see being able to add additional homes on the market is for new homes to be built.  The disparity of new home prices compared to existing home prices, at least in my immediate region is dramatic.  New home prices for properties that are comparable in size and finish level to existing homes sell for as much as 20% more, and you don't even get a fully mature landscaped and fenced yard.  Seeing that new homes are much less affordable than existing homes I don't think this would fix the problem.  Since we do have a need for more supply and the economy is supposedly doing so well then why don't we have more people selling their older homes and moving up improving their lifestyle into a newly constructed home?  Because in Mr. Yun's own words "the economy is sluggish".  The reason more new homes are not being built to satisfy the demand and ease pressure is because that demand for new homes just isn't there.  This is because there just aren't as many people that can afford them.  Believe me, if there was higher demand for new homes the builders would be building them as fast as they could.  Families want a home of their own but they feel the impact of lower wages, fewer work hours and inflation which keeps them in the existing home market and priced out of new construction.    

I have also heard that the banks are holding back foreclosed properties from the market in order to artificially inflate values which also increases the value of their portfolios.  I do not know this for myself so that is all that I will say on the subject.



In conclusion, all of these factors are indicating bubble territory to me.  Dramatic increase in home prices (inflation), interest rates lower than they should be with a weak job market and loosening credit requirements are part of the cause of this bubble.  But I will still give the same advice as I did a few months ago when I wrote my opinion about the 2015 Real Estate market.  Don't wait for prices to go down to buy a home.  If it is the right time for your family act now and don't look back.  Remember, a home is not an investment and debt is not a tool.  Realize that bubbles pop and cycles in all markets are 'normal'.  I haven't the slightest idea of how long this bubble will continue to inflate but I do know what happened to builders who had speculation homes on the market at the time the last bubble popped.  So, if you are speculating in today's real estate market be aware of the risks.  

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The purpose of this site is to provide you with information about what I have learned, my experience, and what my motivations are as a Prepared Guy. I have always felt driven to be ready for any situation by something powerful deep inside me. Being prepared has always served me well. I feel compelled to help others do the same.
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