We’ve seen a real shortage emerge in homes available for buyers. A housing shortage has happened because of the low inventory of previously owned homes and also in the construction industry’s reluctance to jump whole-heartedly into the new home market (especially a shortage of starter homes). Additional pressure is being applied by investors that scour the market with much more experience and deep private pockets to finance all cash sales.
The buyer side of the buyer/seller the equation isn’t as promising as it is for sellers. In addition to limited inventory and more competition is an increasing pent up demand for homes that continues bringing even more buyers into the market to further compete with those that have been home searching for 3 months, 6 months, or more than a year. You can anticipate this becoming more serious during the coming spring market ramp up.
Additionally, buyers are enticed by historically low interest rates they know will not last. Even if they don’t realize that more buyers will be entering the market as foreclosures fall of credit reports and equity appreciation brings more second and third time buyers into the market, active buyers do feel an increasing pressure to complete a purchaser sooner rather than later. Already anxious buyers plus an increasing number of buyers will further heat up the market.
It’s a Healthy Market But a Bubble May Be Forming
Home equity, while keeping the current housing market healthy, is also driving prices higher. This coupled with low inventory will further move prices upward. In totality, all these dynamics, unique to today’s housing market, will continue putting significant upward pressure on home prices. Of the nation’s 40 largest cities, 14 have already seen home prices cross into new highs.
The bubble is likely to come in the form of pricing more and more buyers out of the market. Wages and salaries certainly aren’t keeping pace with increasing prices. The result is that buyers who couldn’t qualify for a loan last year won’t qualify for an even higher loan this year for the same house that has further appreciated in value.
It’s a double whammy when buyers can neither qualify for a loan nor save the needed higher down payment. Just like the unemployment cycle, these people will eventually give up and quit making offers for homes they can’t afford. That’s when the bubble forms.
Sellers become paper rich but cash poor. Compared to the previous bubble, today, homeowners have considerably more skin in the game. On average, 44 percent equity compared to 25 percent at the peak of the last bubble. The result is more room for prices to decline while homeowners still stay in the black.
Bubbles Represent a Market Limit
Prices have already peaked or seen slowing growth. These include markets that are the hottest in the nation. San Jose, California, with some of the highest prices in the nation has fallen off its peak. San Francisco, notorious for ever increasing prices is now seeing prices decline, however modest.
Tight lending standards may prevent a runaway major bubble resembling the one in 2008. As long as subprime loans don’t return to the market, buyers won’t be able to get in over their heads. As these buyers exit the market (hopefully temporarily), a shrinking buyer pool will stabilize and even decrease prices in appropriate markets. Once salaries and prices are back inline with affordable housing, the market will rebalance to comfortably move forward. Hopefully, this won’t be a bubble but rather a correction in the normal real estate cycle.
The bottom line is, it’s difficult to know whether it’s truly a bubble. The problem with bubbles is that we don’t see them when we are already in it. Most people only recognize it once they cannot pay the too high mortgage or when the bottom falls out of their equity.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.