There is one word that strikes the fear into every Realtor… Bubble. And not the fun floaty kind you blow through a wand. We’re talking the nasty, life churning housing kind that makes every recent home buyer, or future home seller, cringe like they just got a shot with a big needle!
Trust me, behind the scenes us realtors and those in related businesses have been quietly debating if we’re on the edge of another bubble or not. As in talking in whispers so as to not jinx the market! Today a colleague forwarded us a WSJ article that indicates that there may be more to whats needed for a bubble than just a run-up in prices. Normally we would just provide a link to the article but here it is in full as well:
“Housing Bubble? Despite Rising Prices, Most Economists Still Say No
– by Laura Kusisto
The S&P/Case-Shiller Home Price Index released on Tuesday was the latest report to show a relentless rise in housing prices, causing some economists to ask: Is another bubble forming?
According to Tuesday’s data housing prices have been climbing for 35 consecutive months, but economists pointed to several reasons why that isn’t a concern, namely that while prices keep rising the rate of growth has slowed. In the first three months of this year home prices gained 0.8%, according to the S&P Case-Shiller national index. That’s down from 2.8% in the first three months of 2013 and 1.2% during the same period of last year.
“There is no bubble to be anxious about,” said David Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices. Price growth in most markets is “a lot softer” than it was a year ago, he noted.
Economists also aren’t concerned about a price bubble because far fewer new homes are being built than a decade ago so there is little concern about oversupply. And most buyers are using cash or getting 30-year, fixed-rate mortgages that don’t carry the same risks as the subprime, adjustable-rate mortgages that many received during the boom.
To be sure, some markets, such as San Francisco and Denver have seen staggering gains. Denver has surpassed its peak home prices in 2006 by nearly 17%.
But some economists said that’s a sign of a normal housing market because in a bubble prices typically rise in tandem across the country, rather than responding to the strength of local economies.
Lawrence Yun, chief economist for the National Association of Realtors, has been among the loudest sounding the alarm that prices are too high. But he said that he isn’t worried about a bubble, just that the lack of affordability may cause demand to evaporate.
“In a sense it is demoralizing for people who want to save up for a down payment,” he said.
Another concern is a possible jump in interest rates. John Burns, chief executive of John Burns Real Estate Consulting Inc., said that would put homes out-of-reach for many at current price levels in many major cities.
Today mortgage rates are roughly about 3.7%. That makes homes in all top 30 metro areas either undervalued or fairly valued at current prices, according to Mr. Burns. But if rates rose to 6%, homes in more than half of those markets, including Los Angeles, San Francisco, Miami, and Denver, would be overvalued.
“We are in a pretty precarious environment,” Mr. Burns said.”
– Nick Timiraos contributed to this post.
The Bottom Line
We think that while it is good news for everyone that we are probably not looking at another housing bubble, we have been sounding the concern for some time over continued rising home prices and the looming prospects of rising mortgage interest rates. From first-time home buyers getting priced out of the market to move-up buyers seeing their dream homes move out of reach to potentially higher mortgage rates shrinking the buyer pool – those are the potential concerns to keep our eye on.
Call me at (925) 487-2353 if you have any questions or needs you may have – I’d love to hear from you!