Sign of Another U.S. Housing Market Bubble?
In fact, since the industry nearly collapsed six years ago, new-home construction for builders like Lennar is now clearly on an upswing.
According to the March 2013 report from the U.S. Commerce Department, new home construction was on pace for more than one million units for the first time since the gaudy days of June 2008.
Much of this home-buying fervor can be attributed to a few important points:
1. A pent-up demand that has built up over the last six years,
2. Low inventories,
3. And an outrageously low interest rate environment thanks to the Federal Reserve.
Is another bubble forming in the U.S. housing market?
Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging.
Are all our eggs in the housing basket?
If you want to include your home as part of your asset mix, Canadians may not be such bad savers after all.
The net worth of Canadians keeps rising — it reached $199,700 per capita at the end of the fourth quarter of 2012. But that wealth is being generated from our flourishing property prices, something that financial planners haven’t always considered in a retirement planning scenario.
An open house for a five-bedroom brownstone in Brooklyn, New York, priced at US$949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for US$2-million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.
The U.S. spring homebuying season has been marked by a frenzy of demand fuelled by the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes. While values remain well below their peak, economists including Stan Humphries of Zillow Inc. and Mark Vitner of Wells Fargo & Co. assert prices in some areas are rising at an unsustainable pace — a dramatic shift from early 2012, when billionaire Warren Buffett said housing “remains in a depression.”
“It’s a big change from a year ago,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “You’ve gone from hearing horror stories about people losing money to hearing stories of frenzy — lots of traffic and multiple offers.”
U.S. home prices jumped almost 11% in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.
You’ve gone from hearing horror stories about people losing money to hearing stories of frenzy
The gains in some U.S. areas aren’t sustainable for a healthy market, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
“If prices keep going up at this rate for another six months, we will have a bubble, and people will get hurt,” he said in a telephone interview.
U.S. buyers spent three times their annual incomes on homes at the end of last year, and those properties were 15% pricier relative to incomes than before the housing bubble of the mid-2000s, according to data from Seattle-based Zillow. Markets such as Silicon Valley, Southern California, Boston and New York will look expensive relative to incomes when mortgage rates rise, Humphries said.
“The Fed has put every home on sale because of its actions,” Humphries said in a telephone interview. “We’re not saying you should ignore the sale sign and not pay a cheaper price. We want people to be aware of the fact that this is unusual and not bake these expectations of high appreciation into their long-term calculus.”
The average rate for a 30-year fixed mortgage was 3.51% this week, and reached a record low of 3.31% in November, according to Freddie Mac. That compares with an average rate of 6.24% from 2001 to 2006.
It’s too early to say another bubble is emerging. So far, the biggest gains are limited to hard-hit markets such as Phoenix and Las Vegas and thriving job centres such as San Francisco, while prices are falling in cities such as Chicago and Indianapolis, according to CoreLogic. Nationally, existing-home sales are about a third off a 2005 peak and home construction is down by 66%. Also, in contrast to the easy lending of the boom years, mortgage standards are strict.
In areas such as Long Island, New York, and Omaha, Nebraska, price gains are within moderate growth levels of 3% to 5%, according to the National Association of Realtors. In other cities, demand remains stagnant and the market is far from overheated.
Homebuyers in Erie, Pennsylvania, a port on Lake Erie in the northwest part of the state, are still finding plenty to choose from, said Debra Fries, a local agent with Coldwell Banker Select. The median home price in the area fell 5% to US$105,000 in the first quarter from a year earlier, according the Realtor group.
“We don’t have any bubbles,” Fries said. “We’re steady as a stream.”
U.S. home prices fell 35% from their July 2006 peak to the bottom in March 2012, and are still 29% off their high, according to the S&P/Case-Shiller index measuring 20 U.S. cities. Nationally, prices dropped so much during the crash that they remain about 7% undervalued, based on comparisons with historical prices, incomes and rents, Trulia Inc. said this week, introducing a feature on its website called “Bubble Watch.”
Still, the recent price surge has made eight U.S. markets — including Orange County, California; Houston; and Portland, Oregon — overvalued, the San Francisco-based real estate data company said.
The housing market has defied predictions of a tepid recovery by many economists. A year ago, Moody’s Analytics Inc. said prices in 2013 would climb 1.6%. The company revised its projections upward for each of the last six months and now expects an increase of 7.5% this year. Gains probably will moderate in 2014, said Celia Chen, a Moody’s housing economist who predicts a 4% rise as homebuilding ramps up and underwater homeowners regain enough equity to sell.
CoreLogic said today that it projects prices will rise at an annualized rate of 3.9% through 2017 after climbing 7.3% in 2012.
Of the 150 metropolitan areas tracked by the National Association of Realtors, 9 out of 10 showed price increases in the first quarter from a year earlier and areas such as Silicon Valley, California; Phoenix; Atlanta; and Reno, Nevada, saw gains of more than 30%, the group said. Prices declined in 17 markets, including Edison, New Jersey; Champaign-Urbana, Illinois; and Allentown, Pennsylvania.
“This is a good spring for sellers in a hurry,” Jed Kolko, chief economist for Trulia, said in a telephone interview. “Buyer demand is stronger than we’ve seen it in years and it’s been strong enough to lift sales despite tighter inventory.”
The buying frenzy was on display at a March open house in Brooklyn, a borough of New York City where the median price rose 14% to US$515,000 in the first quarter from the prior year as the number of listings plunged 45%, according to Douglas Elliman Real Estate and appraiser Miller Samuel Inc. Over two hours, 300 visitors streamed into a three-story brownstone in Crown Heights and it went under contract for more than the asking price less than a week later, said Barbara Brown-Allen, a Douglas Elliman agent who represents the seller.
The fear of losing out on mortgage rates that are close to the lowest on record is spurring the rush, Brown-Allen said. The up-and-coming Brooklyn neighbourhoods of Crown Heights, Bushwick and Bedford-Stuyvesant have surged in popularity during the past year because buyers have been priced out of Manhattan and more exclusive Brooklyn neighbourhoods, such as Park Slope and Cobble Hill, she said.
“It was a zoo — sometimes there were over 100 people in the house at a time,” Brown-Allen said. “Once the inventory is this short, you have a lot of people vying for the same properties.”
Even in markets like Boston, where CoreLogic put home-price gains at a moderate 8% in March, demand is high. Often, homes spend only one day on the market, said Cliff London, a broker with the RE/MAX Home Team in the suburban town of Needham, Massachusetts.
“By the time the first open house is over the offers are coming in, sometimes above asking price,” London said. “There’s a lack of quality inventory — that’s fuelling it.”
In much of the country, inventory has been drained by institutional investors such as Blackstone Group LP and Colony Capital LLC buying single-family homes, often foreclosures, to turn into rentals, said CoreLogic Chief Economist Sam Khater.
Blackstone, the largest buyer in the U.S., spent more than US$4-billion on 24,000 rental properties last year. The company recently bought 1,400 residences in Atlanta, the biggest bulk deal for the fledgling homes-for-lease industry. Such purchases helped to drive prices up 12% in March from a year earlier in Georgia, where values only rose 1.2% six months earlier, Khater said.
Appreciation in Arizona is moderating as investors look in other markets for better yields, Khater said. Prices in the state rose 17% in March from a year earlier compared with a 20% increase in September 2012, he said.
Vitner of Wells Fargo said investors are buying properties as quickly as they can and when they leave, housing will take a hit. Investors accounted for 19 percent of sales in the U.S. in March and even more in some former bubble markets, according to the National Association of Realtors.
“The problem is if they don’t earn a high enough return, they all walk away,” Vitner said. “Investors accounted for a larger proportion of the housing recovery than people realize.”
While the tightness in the existing-home market is driving up sales for new homes, homebuilders can’t increase production fast enough because of labor shortages and rising competition for lots in the best locations. There were 153,000 new homes available for purchase in March, just 10,000 more than a five- decade low in mid-2012.
In Menlo Park, builders are selling houses long before they’re completed, said Keri Nicholas, a Realtor with Coldwell Banker in the affluent Silicon Valley town. Land is in such short supply that they’re buying million-dollar homes to knock down and put up mansions, she said.
A three-bedroom house Nicholas listed for US$2-million last month received four offers from builders. It sold to an owner- occupant who paid all cash, she said.
In south Florida, 20 condominium towers with more than 3,300 units are under construction, according to Peter Zalewski, owner of Condo Vultures LLC, a brokerage and consulting firm based in Miami. Another 14,600 units are planned, about three- quarters of them for Miami-Dade County, where the crash left dozens of unfinished and failed condo projects, now mostly filled with renters, he said.
“I don’t think there’s any question that we’re in the early stages of the next great south Florida construction boom,” Zalewski said.
The conditions that have propelled prices up for the past year won’t last, said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania.
“We’re eventually going to see mortgage rates increase, supply increase, and affordability decline, so you probably cut price gains at least by half,” Naroff said. “It will be a slowdown, not a crash.”
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U.S. House Prices Accelerating, Fed Succeeding in Inflating New Ponzi Housing Market Bubble?
The Fed’s QE-Infinity money printing programme to buy mortgage backed securities and government bonds that is running at a monthly rate of $85 billion is succeeding in inflating another US housing market bubble as house pricessurge by an annualised rate of 11% in March (28th May) with some cities such as Phoenix seeing house prices soar by an annualised rate of 20%.
Now whilst the title of this article may contain the word bubble, however understand this that we are in the very early stages of the housing bull market that follows on from the embryonic bull market of 2012 which has many years to run, so do not make the mistake that many market commentators are making in the wake of the latest data, those who never saw this bull market coming are busy already proclaiming it as bubble that is about to burst.
My in-depth analysis and concluding trend forecast of January (12 Jan 2013 – U.S. Housing Real Estate Market House Prices Trend Forecast 2013 to 2016), based on the latest data available at the time concluded in a detailed trend forecast for the US house prices to target a rise of 30% by early 2016 as illustrated by the original graph below, which followed a years warnings to prepare for the birth of new housing bull markets for the UK and US as I repeatedly iterated during 2012 as being the year of the embryonic bull markets that have morphed into bull markets proper for both countries.
US House Prices Forecast Conclusion – As you read this, the embryonic nominal bull market of 2012 is morphing into a real terms bull market of 2013, with each subsequent year expected to result in an accelerating multi-year trend that will likely see average prices rise by over 30% by early 2016, which translates into a precise house prices forecast based on the most recent Case-Shiller House Price Index (CSXR) of 158.8 (Oct 2012 – released 26th Dec 2012) targeting a rise to 207 by early 2016 (+30.4%).
This analysis was also accompanied by a youtube video version.
An updated graph for the case shiller US house prices index shows that the US housing market is trending in line with the forecast trend trajectory.
So yes, whilst it is obvious that the rampant money printing policies of the UK and US ARE creating NEW ponzi housing market bubbles, however these bull markets have only just begun and are nowhere near to getting to the euphoria bubble stage as my most recent analysis for the UK suggests that the UK housing bull market could run for the rest of this decade before next popping, hence why I do not see any reason to rush to publish a detailed trend trajectory for the UK market, but rather continue to publish a series of in-depth analysis on its mega-trend drivers ( 03 Jun 2013 – UK Housing Bull Market Opportunities In Britain’s Multiculturalism Immigration Crisis), towards arriving at the most probable trend trajectory.
Similarly, whilst my existing US housing market forecast is for into early 2016, that does not necessarily mean that I expect the market to peak and crash in 2016, for it is highly probable that just like the UK this current US housing bull market could last for the whole of this decade, or quite close to, so I see all of the discussions in the mainstream press and blogosfear concerning whether the US housing market is in a bubble or not as being ludicrous because I doubt it will even be in a bubble 3 years from now, let alone today!
The bottom line is that the global central banks ar engaged in an inflation war as they competitively debase their currencies via unprecedented money printing to INFLATE asset prices which are LEVERAGED to inflation, this was true for the stock market in 2009 (as I wrote at the time) and is true today for housing markets as the fractional reserve banking system ensures that whatever the central banks print will be leveraged up by at least X10 and during the mania phase as much as by X90 which will be driving the next subprime mortgage market that will once more ramp up prices into the final euphoria phase, which means a LOT of inflation is yet to come, far beyond anything that the academic economists that populate the mainstream press can ever conceive of, as from what I see they are still obsessed with non existant deflation whilst the housing bull market juggernaut rumbles on as illustrated by one of the most popular housing market articles of recent days as published by Forbes magazine.
By Peter Schiff – concluding –
Of course the real risks in housing center on the next leg down, in what I believe will be a continuation of the real estate crash. We can’t afford to artificially support the market indefinitely. When significantly higher interest rates eventually arrive, the fragile market will again be impacted. We saw that movie about five years ago. Do we really want to see it again?
Meanwhile the smart money continues to pile into the US housing market as they snap up bargains (they have been doing so since at least mid 2012) whilst academics and mainstream journalists / salesmen, perma bears at blogosfear sites such as Zero Hedge, and off course cry babies who perpetually sit on the side lines always too fearful to commit, will as usual be found out to be wrong! Because they will NEVER understand what drives markets for the fundamental fact that they don’t tend to put their own money on the line. Instead, I have put my own money where my mouth is and have committed 60% of my assets to the UK housing market on the basis of detailed analysis, just as I committed 30% to the stock market during 2009 because there is nothing that focuses ones mind to get it right than actually having a large chunk of ones wealth at risk.