What's This Talk of a New Housing Bubble?

There was great news for the housing market this morning.

Or terrible news, depending on how you interpreted it.

Nationwide housing prices grew 9.3% in the 12 months ended February, according to the S&P Case-Shiller Housing Index. That was the biggest annual gain since 2006, when the housing bubble peaked.

This is excellent for homeowners, especially those underwater on their mortgages. But it's scary for those who think it signals a return of the housing bubble that did so much damage to the economy. And there were plenty of them. 

"The Second Housing Bubble Continues to Inflate," wrote Business Insider.

"Presenting: The Housing Bubble 2.0," wrote the blog Zero Hedge.

Please. Calling this a housing bubble is dangerously premature.

As Warren Buffett says, "Price is what you pay; value is what you get." Just as stock prices surged in 2009 without pushing valuations to extremes, rising home prices don't necessarily indicate mania in the housing market.

There are a few ways to measure home values, rather than simply home prices.

One is the inflation-adjusted price over long stretches of history. Yale economist Robert Shiller calculates this data going back to the late 19th century:

Source: Robert Shiller. Data through Q4 2012.

Far from bubble territory, real home prices are pretty close to the historic average. And this may even be overstating the case, since the average square footage of American homes has increased tremendously over the past few decades.

Another is the ratio of home prices to average rents. Here too, "up" doesn't put us anywhere near "bubble":

To put some numbers on this, a ratio of nationwide home prices to rents I calculate with Professor Shiller's data and the owners' equivalent rent portion of the Consumer Price Index is now almost exactly equal to its average since 1987, which is the farthest back we have good data for. If you think current prices look bubbly, then you implicitly take the position that we've been in a bubble for more than a quarter-century. Which is just cranky.

Or take home prices measured against average incomes:

Sources: Robert Shiller, Census Bureau, Sentier Research.

Here too, it's kind of obnoxious to call this a new bubble.

Finally, we might call the housing market a bubble if a growing share of Americans were becoming homeowners, as lending standards dropped. But the opposite is occurring. According to the Census Bureau, the homeownership rate is now at the lowest level since 1995.

The reason home prices are rising right now has little to do with exuberance. Instead, the rate of new-home construction is still below the rate of household formation. Coming off years when new construction barely kept up with the rate of housing demolitions, the supply of homes for sale is now the lowest it's been eight years.

Homebuilders are trying hard to ramp up production, but doing so is easier said than done, given labor shortages in the construction industry. They're also enjoying pricing power for the first time in seven years and are unlikely to let go of it until they have to. As Donald Tomnitz of DR Horton (NYSE: DHI  ) recently put it:

We're clearly raising prices on each and every one of our communities on a house-by-house, on a subdivision-by-subdivision basis. ... We do have costs which are going up in some of our markets and with some of our subcontractors, but clearly, our pricing power is exceeding the cost increases that we have today.

There's plenty of room for the housing industry to run, as Jeffrey Mezger of KB Homes (NYSE: KBH  ) pointed out:

Although the pace of the housing market recovery is gaining momentum, it is important to keep in mind that we are still in the early stages of the recovery. And there's a long way to go before the industry reaches normalized activity levels.

Economist A.C. Pigou once said: "[T]he era of optimism dies in the crisis, but in dying it gives birth to an era of pessimism. This new era is born, not an infant, but a giant." With cries of bubbles after home prices show the slightest hint of optimism, I now know what he means. 


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  • Report this Comment On April 30, 2013, at 8:27 PM, TheDumbMoney wrote:

    Zero Hedge obnoxious? Surely not....

  • Report this Comment On May 01, 2013, at 10:24 AM, njusko wrote:

    Take a look at your chart labelled "Real Home Prices", now take note of both of the small housing bubbles we saw in the late 70's and late 80's. Do you notice anything immediately following those bubble peaks in comparison to the historical average?

    That's the issue that the pessimists are taking caution with, we haven't seen the counter-cycle to the 2000's housing bubble that historically follows the trend in housing. The reason? We hear it every day..."Historically Low Interest Rates!"...Bernanke even admitted that his primary goal was to keep housing prices up, even by artificial means.

    The question to keep asking yourself is this..."What, fundamentally, has improved in the local economy since last year?"...if you can't answer that and you're seeing rapidly rising prices, congratulations, you've found an inflation-fueled asset bubble (read: low interest rate supported by bond purchases made on dept, i.e. QE1,2,3,4,5...).

    Also, your comment here:

    "Finally, we might call the housing market a bubble if a growing share of Americans were becoming homeowners, as lending standards dropped. But the opposite is occurring. According to the Census Bureau, the homeownership rate is now at the lowest level since 1995."

    Made me nauseous, the housing bubble was not CAUSED by homeowners, it was CAUSED by investors (remember how popular "flipping" was? gosh, that sounds familiar now doesn't it? keep hearing..."granite countertops, stainless steel appliances, hardwood floors" in house ads?). Rising home prices, plus lower and lower rates of homeownership can ONLY mean one thing, investor driven speculation.

    That's a bubble. End of story. A bubble can take multiple forms, it can be a dramatic rise in prices compared to historical averages, and it can also be a refusal to allow home prices to fall lower to allow the market to equilibrate.

    The last one was obvious to individuals who were not delusional about economic fundamentals, and it was confusing to those who kept thinking "but this time it's different..." goodness, doesn't that sound familiar too?

  • Report this Comment On May 01, 2013, at 10:33 AM, TMFMorgan wrote:

    <<What, fundamentally, has improved in the local economy since last year?>>

    More than 1 million households were formed.

    Far fewer than 1 million new homes were built.

    That's really all you need to know about the housing industry.

  • Report this Comment On May 01, 2013, at 10:42 AM, njusko wrote:

    "More than 1 million households were formed.

    Far fewer than 1 million new homes were built.

    That's really all you need to know about the housing industry."

    And yet, the U.S. homeownership rate has fallen to its lowest level since 1995?

    I guess you assume that all new households are going into new homes?

  • Report this Comment On May 01, 2013, at 10:47 AM, TMFMorgan wrote:

    No, they're going into some homes -- exiting homes, existing apartments, new homes, new apartments -- whatever. The point is that demand for shelter is increasing much faster than the supply of new shelter, which pushes up prices.

    It's the opposite of last decade, when construction was 1 million+ units higher than household formation each year.

  • Report this Comment On May 01, 2013, at 10:54 AM, njusko wrote:

    "No, they're going into some homes -- exiting homes, existing apartments, new homes, new apartments -- whatever. The point is that demand for shelter is increasing much faster than the supply of new shelter, which pushes up prices."

    Here's a reminder as to how the homeownership rate is calculated:

    Number of homes occupied by the homeowner.

    ----------------------------------------------------------

    Number of homes in the marketplace.

    If this ratio has fallen, this can only mean one of two things...either the numerator has gotten smaller, or the denominator has gotten larger. Either one destroys your assertion that this is a simple supply/demand issue.

  • Report this Comment On May 01, 2013, at 3:10 PM, Pthill65 wrote:

    "Here's a reminder as to how the homeownership rate is calculated:

    Number of homes occupied by the homeowner.

    ----------------------------------------------------------

    Number of homes in the marketplace.

    If this ratio has fallen, this can only mean one of two things...either the numerator has gotten smaller, or the denominator has gotten larger. Either one destroys your assertion that this is a simple supply/demand issue."

    I accept your premise of number of houses on the market as supply. Why is number of owner occupied homes a positive indicator of demand? Doesn't that assume no new households, no new demand from those households?

  • Report this Comment On May 01, 2013, at 3:58 PM, njusko wrote:

    "I accept your premise of number of houses on the market as supply. Why is number of owner occupied homes a positive indicator of demand? Doesn't that assume no new households, no new demand from those households?"

    How are you getting to that assumption?

    An "owner-occupied home" is the traditional homebuyer, you buy the house to live in it. It makes no assumption about household creation. It simply asks the question...of the houses out there in America, how many of them are being lived in by the owner?

    The only reason this ratio could be decreasing, while prices are increasing is because houses are being demanded by individuals that are not living in the houses they are buying. This is investor-driven demand.

    Traditional buyers typically don't see houses as a speculative asset, they see it as a home.

    Investor buyers typically see houses as a speculative asset.

    This the cause for concern. Speculation in an area where money is cheap will inevitably always lead to a bubble.

  • Report this Comment On May 01, 2013, at 6:28 PM, Seanickson wrote:

    and of course if you look at median monthly payments as a percentage of median income, housing affordability is pretty close to its all-time peak.

  • Report this Comment On May 01, 2013, at 6:54 PM, dsciola wrote:

    numbers, stats, he said/she said, this article and commentary reminds me of the age-old proverb...there are a thousand ways to skin a cat...

    Nonetheless, definitely enjoying reading all of this and trying to conclude whether housing is back to forming a bubble or not.

    Seannickson,

    "and of course if you look at median monthly payments as a percentage of median income, housing affordability is pretty close to its all-time peak."

    So when you say housing affordability is near its all-time high, are you implying monthly rents relative to income is high, implying theyre affordable, or the opposite, implying renters and homeowners are 'stretching themselves' here? Can't figure out from your statement.

    FWIW...in the Seattle area, homes have returned to bubble-esque prices, along with demand...a home that gets put on the market will be sold in a week tops...buyers, whether homeowners or speculators, are buying almost anything and everything on the market.

    Whether thats due up here to a mania or lack of supply, can't say...know this above scenario from my 30-ish older bro searching for first home

    Dom

  • Report this Comment On May 01, 2013, at 7:20 PM, dsciola wrote:

    Might I quickly add to my anecdote above that from what I can tell, these buyers are ACTUAL homeowners and NOT just speculators.

    Lot of folks coming from elsewhere to work for GOOG, AMZN, MSFT and other tech firms that have been adding more offices up here.

    Dom

  • Report this Comment On May 01, 2013, at 7:29 PM, hbofbyu wrote:

    Interest rates are at historic lows: Still less than 4 percent on a 30-year fixed-rate mortgage.

    The Federal Reserve, in an effort to bolster (manipulate) the housing market and stimulate (manipulate) the economy, is keeping short-term interest rates near zero. That enables investors to borrow cheaply and look for under priced homes in desirable markets, they are buying up foreclosures and under priced properties in bulk.

    Banks have tightened lending standards and require higher down payments, even if you're ready to buy a house, you can't always get a mortgage – and if you can get a mortgage, you're likely to get outbid by 20-30 percent by the investors.

    The Federal Reserve has also been buying up mortgage backed securities as part of the ongoing process of "quantitative easing" designed to juice the economy and keep the housing market from stumbling.

    The housing market is on government crack right now and not healthy. I see spikes and falls. Call them mini-bubbles if you want. The Fed is supporting housing in a manner unprecedented to anything we have seen in history.

  • Report this Comment On May 01, 2013, at 7:48 PM, madisonmarbles wrote:

    In San Diego it's gotten to the point where a 20% down, asking price offer is probably not gonna get your bid any attention. In the last few months, I have lost count of the number of times that a home I am interested in is no longer accepting offers. Homes are coming on the MLS and going SOLD more often than not now in 5 to 10 days, or less, full cash offer. The average Joe is almost locked out of this market now. It appears Wall Street has come up with an even better way to create a housing bubble; cut out the middle man (ex. mortgage securitization) and just send cash buyers out into the market to buy up all the real estate they can, and then sit on it. So as has been pointed by others, it's investors that often create the bubbles. And if what we are seeing in San Diego is not a "bubble" yet, it will be very shortly before this latest "Wall Street-screw the little guy" play is done. And I wonder who's gonna be doing the bailing out, AGAIN.

  • Report this Comment On May 01, 2013, at 8:44 PM, Chontichajim wrote:

    Homes are temporarily selling quickly here mostly to owner occupiers since new building has been slow over the past few years. The builders sold all the pre 2009 inventory and may be waiting for a stronger recovery before taking on new lots. Prices will moderate as building catches up with demand. Higher interest rates will eventually impact sale prices, but as we have seen in the past direct interest rates have less impact on sale price and more on the type of loan used to make a purchase.

  • Report this Comment On May 01, 2013, at 9:24 PM, njusko wrote:

    "but as we have seen in the past direct interest rates have less impact on sale price and more on the type of loan used to make a purchase."

    It's going to be difficult to use historical data to analyze how interest rates will affect prices in this market. Typically interest rates have risen along with rapid growth in the economy (y'know, that rebound in the economy we've always heard about), which means that growing incomes were able to compensate for the additional interest paid on relatively stable prices.

    Considering that our "best case" solution is relatively meager growth in comparison to what we've seen before, interest rates will, more than likely, have a much, much more significant effect than they previous had.

  • Report this Comment On May 01, 2013, at 9:31 PM, njusko wrote:

    "Homes are temporarily selling quickly here mostly to owner occupiers since new building has been slow over the past few years."

    Has the home-ownership rate increased or decreased in your area? That's the simplest measure of improvement. The reason this is so significant is because foreclosures aren't excluded from this equation, whereas most supply stats are incredibly twisted in what they exclude/include. Numbers lie, ratios clarify.

  • Report this Comment On May 01, 2013, at 9:33 PM, njusko wrote:

    "significant effect than they previous had."

    *previously

  • Report this Comment On May 01, 2013, at 10:28 PM, dsciola wrote:

    njusko,

    "It's going to be difficult to use historical data to analyze how interest rates will affect prices in this market."

    Beggin ur pardon, but wont this negatively affect prices most likely?

    I would figure that easy cr / ZIRP = increased housing demand = increasing prices, whereas tightened credit / raising of rates = lowered demand = decreasing prices...all other things equal...Hence, also the reason why Bernanke is pumping QE into the economy, holding interest rates near zero, and thus yielding this discussion over whether his strategy will work and housing will continue rebounding or will fail and bubble 2.0 will burst.

    "reason this [home-ownership rate] is so significant is because foreclosures aren't excluded from this equation, whereas most supply stats are incredibly twisted in what they exclude/include. Numbers lie, ratios clarify.

    What other stats/figures/ratios are you referring to as 'twisted?' Case-SHiller? New building permits? Curious to hear your insight here.

    How do you find the home-ownership rate in a city, state, area, etc? I'de be curious to find out what it is in Seattle now, per my example above.

    Like the clever rhyme as well...quite true

    Dom

  • Report this Comment On May 01, 2013, at 11:37 PM, hrmmmwhynot wrote:

    Anyone who thinks this isn't a bubble -- that this is actually a healthy demand driven real estate market has got to be a little bit ignorant or not aware of the current state of real estate at all. Go and google Blackstone one of the largest institutional investors buying up single family homes across the United States. There are many of them out there and they are accelerating their purchases to keep up with the rising up home prices. Billions are being pumped and bought out with cash from Wall Street. njusko, eanickson has absolutely got this right. The income to house price ratio is getting wider and in some cases is surpassing the peak levels of 9x in 2006. I've seen this first hand looking for homes and others who have been in the market should have noticed this too. In a country that doesn't really have much in savings who do you think is coming in with all cash offers and no contingencies. Institutional investors are scraping up not just multifamily homes, but single family homes, short sales, forclosures they are buying in bulk off of banks.

    You want to know who these institutional investors are? Here's a few: Cerberus Capital Management, Blackstone Group LP, Colony Capital LLC, Two Harbors Investment Corp. .

    Don't be a fool, no normal market has houses flying off as soon as they are listed with all cash offers and no contingencies while the median income has basically remained stagnant.

  • Report this Comment On May 02, 2013, at 12:17 AM, ravens9111 wrote:

    The recovery in housing is not due to an improved economy. Rather, it is the result of lower supply of distressed properties. Foreclosures, short sales, deed-in-lieu, etc. peaked a couple years ago. These distressed sales have been a much smaller percentage of home sales. Home builders are reaping the benefits as existing home sales are now not as competitively priced as new homes. Why would anyone want to buy a new home when they could buy a distressed home for a much steeper discount?

    The real question should be, where is this "shadow inventory", if it exists? Have the banks/servicers actually done loan modifications to keep those in their home? Strategic default was a big thing during the bust. The decline in strategic default could be attributed to the HARP and HAMP Programs that have allowed those underwater to refinance and get out of their old loan. Foreclosure activity was a big reason for the excess supply of homes and home prices dropped precipitously.

    As far as a new housing bubble is concerned, I do not think we are there quite yet. However, home prices should not appreciate much more than the rate of inflation. The rate of appreciation should be a cause of concern, but I think this is attributable to the decrease in distressed sales.

    As mortgage rates hover around all-time lows, I do think homebuyers are given a false sense of buying power. The amount they can afford to repay based on all-time low interest rates is quite deceiving.

    I think we will see low mortgage rates for quite some time. You could see home prices continue to rise due to these low interest rates. However, when the Fed ends the MBS buying spree, rates will go up and homebuyers won't be able to afford as much as they could at lower rates. The bull case would be that the Fed would not raise interest rates unless the economy was growing or inflation was exceeding it's target. Rising interest rates indicates the economy is improving so growth can be contained.

    The bottom-line is that as long as homebuyers are providing full documentation for mortgages, a housing bubble is less likely to occur. Investors paying cash for homes are most likely doing so for fixed rental income, not speculation. One other thing to consider is that the MILLIONS of homeowner's that lost their home to foreclosure or short sale during the bubble will soon be eligible to buy a home again. Of course, many of these homebuyers will still be locked out of the market if their credit score is not high enough or they don't document their income (stated income). I would think most of these previous homeowner's will try to buy a home again in their lifetime once their financial situation has improved.

  • Report this Comment On May 02, 2013, at 3:24 AM, kyleleeh wrote:

    @njusko

    <<"Here's a reminder as to how the homeownership rate is calculated:

    Number of homes occupied by the homeowner.

    ----------------------------------------------------------

    Number of homes in the marketplace.

    >>

    That makes no sense whatsoever. Home owner ship rate is calculated as:

    Number of households that own their home

    ------------------------------------------------------

    Total number of households

    The number of households on the market has nothing to do with the calculation. If every household in the country owned their home, the homeownership rate would be 100% no matter how many, or how few houses were on the market.

  • Report this Comment On May 02, 2013, at 4:02 AM, sevenheart wrote:

    ravens9111,

    "As far as a new housing bubble is concerned, I do not think we are there quite yet. However, home prices should not appreciate much more than the rate of inflation. The rate of appreciation should be a cause of concern, but I think this is attributable to the decrease in distressed sales."

    You are on to something with your point on inflation. Keep in mind that the Govt doesn't measure inflation the same way it did in the 60s, 70s or 80s. Supposedly we have had no inflation for the past 5 years, but you can buy 4 lbs of sugar or flour for the same price you paid for 5 lbs in 2008 (try to find 5lb bags-not on the shelves). There are 14 oz of cereal in a box as opposed to 16 oz previously- it's classic concealment of inflation by repackaging. We have had significant inflation no matter how the numbers have been manipulated to deny it, perhaps this 9.3% increase in home values is a revelation of the true rate of inflation.

  • Report this Comment On May 02, 2013, at 4:13 AM, sevenheart wrote:

    Other inflation examples- just read beef prices are at a 10 year high, gasoline, home heating/utilities. Food, utilities and transportation, all are factored out of current inflation calculations.

  • Report this Comment On May 02, 2013, at 8:32 AM, njusko wrote:

    @kyleleeh

    "That makes no sense whatsoever. Home owner ship rate is calculated as:

    Number of households that own their home

    ------------------------------------------------------

    Total number of households"

    That's completely incorrect.

    "In the US, the homeownership rate is created through the Housing Vacancy Survey by the US Census Bureau. It is created by dividing the owner occupied units by the total number of occupied units."

    http://en.m.wikipedia.org/wiki/Homeownership_in_the_United_S...

    It's not comparing households, it's comparing ownership vs renting.

  • Report this Comment On May 02, 2013, at 9:16 AM, Jamesband wrote:

    Consider an average affordable house built today in a decent residential area (2 bath, 3 bedrooms). The average cost of building supplies (for exterior and interior standard good grades materials) is, on the conservative side, 60 to 70K. Let’s include labor cost, for me that’s 40% of material cost, again conservatively, is all you should be paying or 24 to 28k. Land, 20k for the lot and your looking at a cost of about 120K. For every house that is selling between 180 to 220k right now you are looking at a value bubble of 60 to 100k. From what I’ve seen, if you look to purchase within a more pristine area (whatever that is) your cost for the same house may go up significantly… adding to the already value over cost bubble. Once a buyer knows his/her value over cost bubble price, you will be able to determine what you are paying for the location you selected. The total bubble therefore is value over cost plus demand. From my perspective, everyone is again paying way too much for their homes and it’s because no one is really calculating the cost to value, and where they chose to homestead.

  • Report this Comment On May 02, 2013, at 9:26 AM, Gator626 wrote:

    <<"Investors paying cash for homes are most likely doing so for fixed rental income, not speculation. ">>

    ravens9111 nailed this one. I was reading the comments about cash buyer investors/speculators sitting on homes, and was going to comment, but looks like I was beat to it. While it may not have been the dominant case in the 2006 housing spike, most investment based buys in today's market have to be for fixed income purposes (collecting rent) as opposed to pure speculation.

  • Report this Comment On May 02, 2013, at 10:34 AM, njusko wrote:

    "While it may not have been the dominant case in the 2006 housing spike, most investment based buys in today's market have to be for fixed income purposes (collecting rent) as opposed to pure speculation."

    That's not the point.

    Investors look for yield, whatever form that may come in. Bond markets are yielding next to nothing with interest rates so low, so investors are looking for another fixed income stream, notably rent. Assuming that people have to live somewhere, safe assumption to make, right?

    If this sounds familiar, it's because they tried this same approach with MBS. Investors weren't holding onto houses for pure appreciation then either, that was just an indirect result as those "safe, fixed-income streams" of mortgage payments were assumed to be the best source of income following the last interest rate drop in the early 2000's.

    The problem is that when you have investors in the marketplace, it creates the illusion of growing end-consumer demand in the housing economy. This drives prices up and up and up, until...interest rates rise and there is an alternative fixed-income stream available again in the bond market. Investors dump. The housing economy shows how many people are truly interested in owning homes and you're left with actual values to the end-consumer.

    Remember, the trigger point for the last bubble was when Greenspan slowly started raising interest rates upward in 25 basis point increments in the mid-2000s. This is more than likely going to happen again as Bernanke tries to exit QE.

    You're right, investors didn't directly cause prices to rise, but it is an unavoidable indirect side effect.

  • Report this Comment On May 02, 2013, at 10:58 AM, njusko wrote:

    The real risk to investors seeking yield in the rental market is the fact that a rental is significantly easier to simply walk away from than was a home purchase.

    However, I can understand the sentiment that it will be easier to replace the tenant and revitalize the income stream. But people rent with the explicit notion of flexibility in mind, you pay the premium of renting over owning in order to maintain flexibility and being able to move to another location that may provide a better job opportunity.

    I think this is an act of desperation by investors to replace the yields they saw with the boom in MBS following the Dot Com bubble and cheap money. You can almost hear the logic at work:

    "Everyone buys a house and has to pay mortgage payments...obviously fixed-income streams tied to mortgages are a safe and lucrative investment strategy!

    Ok...that didn't work as planned.

    Everyone has to live somewhere and more people are renting nowadays...obviously fixed-income streams tied to rentals are a safe and lucrative investment strategy!

    Ok..."

    What I believe we're witnessing is the replacement of one large, national real estate bubble with a series of smaller, mini-bubbles in specific markets that have always had a strong rental base. Just look at the major markets showing the typical "warning signs" of bubbles...LA and DC...according to Redfin, IF there are bubbles being formed, these are the #1 and #2 markets where this is happening, both of them are notoriously transient in their workforce.

    Markets that have maintained a strong, middle-class job economy with underlying economic fundamentals are not seeing this increase. If this was really about people gaining more confidence in the economy and job security, why are we not seeing the rise in those areas as well? (notably, DFW comes to mind with the job market in energy).

  • Report this Comment On May 02, 2013, at 11:53 AM, kyleleeh wrote:

    <<"In the US, the homeownership rate is created through the Housing Vacancy Survey by the US Census Bureau. It is created by dividing the owner occupied units by the total number of occupied units."

    http://en.m.wikipedia.org/wiki/Homeownership_in_the_United_S...

    It's not comparing households, it's comparing ownership vs renting.>>

    owner occupied units=households that own their home

    total number of occupied units=total number of households.

    You claimed it was dividing by the number houses on the market, you're own source disclaims this. If everyone in a given area owns their home there could be only one house on the market or 100 billion houses on the market, but the homeownership rate would still be 100%.

    Number of houses on the market has nothing to do with calculating homeownership rate.

  • Report this Comment On May 02, 2013, at 12:14 PM, njusko wrote:

    "You claimed it was dividing by the number houses on the market, you're own source disclaims this. If everyone in a given area owns their home there could be only one house on the market or 100 billion houses on the market, but the homeownership rate would still be 100%."

    You're correct, my apologies, the denominator is occupied units.

    "If everyone in a given area owns their home there could be only one house on the market or 100 billion houses on the market, but the homeownership rate would still be 100%."

    True, but I think you're still not quite understanding the point I'm trying to drive home...more people are renting homes right now than are buying them.

    We're being constantly told that "this recovery is real", however, a "real recovery" in the housing market requires the individuals buying the houses to actually be the ones living in them. This is why Obama has made multiple resolutions to help loosen lending standards to individuals with risky credit and first-time homebuyers:

    http://www.theatlanticwire.com/business/2013/04/obamas-new-h...

    The problems with this approach are obvious, but that's not the point of bringing this up. The point that should become obvious to you is that this housing "recovery" is artificial. We have not fallen to pre-bubble real housing prices, instead, we've bounced along this new trendline that's being propped up by unprecedented Fed involvement. Once that support is removed, barring some massive improvement in the US economy (which, as of yet, remains to be unseen...I'm hopeful, but not holding my breath), we're going to have to fall to historic levels, ON AVERAGE, which means that we're actually going to have to fall to the counterpoint of the high we saw in the housing bubble, this is how every single real estate cycle has operated in the past and it is delusional to think that for some particular reason..."this time it's different!" (the most famous of last words).

  • Report this Comment On May 02, 2013, at 12:18 PM, njusko wrote:

    "Number of houses on the market has nothing to do with calculating homeownership rate."

    You're right...my assumption was actually more on the conservative side, thank you for pointing that out. If the ratio is falling and is based ONLY on occupied units, what do you think adding in unoccupied units is going to do for the ratio?

  • Report this Comment On May 02, 2013, at 6:11 PM, dsciola wrote:

    So investors are clamoring for yield, that makes sense, the Fed itself has even admitted they're concerned about this...

    http://topic.worlds-luxury-guide.com/article/06PXg9Ddnb68F?q...

    That link links to a prior CNBC article where Fed, and other easy cr pushing central bankers, talk about being in 'uncharted territory' and 'flying blind'...I dunno y, but CNBC took down the link, hopefully someone else can find it...later on a Fed banker admits they see investors clamoring for yield a lot, which they're concerned about...

    Nonetheless, I dont think I buy the argument that investors are so yield-starved that they are bubbling up the housing market, or the pseudo-conspiracy theory that PE firms, hedge funds, and other institutionals are fueling the bubble by gobbling up Real Estate.

    My reason's being...

    1 - Still lots of money in bonds. Investors clearly clamoring for yield there, I'de anticipate a massive outflow of bonds would precede a clamoring into RE / rental properties by 'pure-play' investors/speculators as opposed to actual homeowners.

    2 - Wall St fat cats scouring the country-side and coordinating a 2nd RE bubble by buying up cheap RE sounds too far fetchd, in my humble opinion...a lot of these same players got burned years back due to RE also...

    3 - Housing prices collapsed following the Great Recession...it makes sense, to me at least, that at some point, buyers would return to the market and take advantage of, relatively lower prices.

    4 - Investing in RE for rental income is fairly normal as well. My family is in the RE business and has done well historically in this regard long before, leading up to, during, and after the Great Recession....

    ...If you know what you are doing, you can generate significant cash flow by buying property and renting it to tenants to cove your mortgage, assuming you can keep the place full, manage costs, etc...

    ...Of course, other RE investors may also try to make money by simply flipping the homes they purchase vs actually generating cash flow on them and if inflation is on your side, you mite actually succeed here as well...

    ...Does this activity 'hide' or 'inflate' actual homeownership and real property value vs perceived price? My guess is it may, if clearly too many ppl are doing it...not sure what evidence is out there to support the bubble pitch, meaning there is abnormally high house flipping and rental cash flow buying activity, vs the non-bubble pitch that this activity is moreso just returning to normal after the worst housing crisis in memory.

    Also, if investors are clamoring for yield, I'de assume they'de prefer other methods vs just real estate. What evidence is their out there that investors are so yield-starved that they are turning to real estate to satisfy this 'need' vs bonds, dividend paying stocks, and other income generators? My guess is, real estate would be perceived as the most risky of the 3 for most investors...so if they want steady cash flow and safety, they'd invest, or speculate, in bonds and dividend stocks.

    Feel free to enligten me, love to hear further thoughts as well.

    Dom

  • Report this Comment On May 02, 2013, at 6:17 PM, dsciola wrote:

    BTW, dunno if u've been following along Housel since u wrote this, but would be curious to hear some of ur always interesting thoughts too ;)

  • Report this Comment On May 02, 2013, at 11:13 PM, hrmmmwhynot wrote:

    "My guess is it may, if clearly too many ppl are doing it...not sure what evidence is out there to support the bubble pitch, meaning there is abnormally high house flipping and rental cash flow buying activity, vs the non-bubble pitch that this activity is moreso just returning to normal after the worst housing crisis in memory."

    dsciola, I live in California Bay Area, and everywhere I've seen are houses that have been clearly upgraded in one area (kitchens usually or bathrooms) and resold to the public. Asking price is also just a price, everybody is always bidding minimum 10-20% over the asking price even if it is a complete dump.

    Now, make no mistake, I can't simply extrapolate the situation in the Bay Area to be the same around the country, but if you just google Blackstone, Cerberus investment group etc, you will see that large institutions are in there. There are articles written about it, and the CEO of Blackstone was on CNBC just two days ago explaining how their strategy was to buy up single family homes and rent them out because his assumption was that average families simply could not afford 20% down payments.

    Now, is this an indication of a bubble? Investopedia defines a 'speculative bubble' as:

    "A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest."

    Hmm... buyers outnumbering sellers beyond the objective analysis of intrinsic value... people bidding way over asking price just to get a crappy home... just put two and two together.

    I'm not sure if anyone here has been involved in bids, but I have seen this first hand and not through some article by an analyst simply putting together pretty graphs and reports. It's easy enough to measure the average income per capita in the area of the home being sold against the final transaction price of those homes being sold - city-data.com will show you all the statistics. Measure that and you can spot the bubbles.

    It's all nice and academic to spew out theories and rhetoric, but what's happening in the real world usually doesn't reflect in the news until it's in the past. What's in the news now has been a steady tide rising since last year. They are way late to the game.

  • Report this Comment On May 02, 2013, at 11:42 PM, njusko wrote:

    "dsciola, I live in California Bay Area, and everywhere I've seen are houses that have been clearly upgraded in one area (kitchens usually or bathrooms) and resold to the public. Asking price is also just a price, everybody is always bidding minimum 10-20% over the asking price even if it is a complete dump."

    For what it's worth, we're seeing the same thing in the DC metro area as well.

    Granite countertops, stainless steel appliances, hardwood floors...it's becoming downright cliche seeing these things in models that are now selling at a 30-40% premium.

    On a lighter note, when Modern Family has a show where the premise is the (somewhat) successful "flip" of an older house...that's gotta tell you something about the current zeitgeist.

  • Report this Comment On May 02, 2013, at 11:53 PM, njusko wrote:

    @dsciola, I'll address points 1 and 3 as they are economic in nature, can't really talk to the other items.

    How much new money was generated by means of QE? You have to measure the bond market in terms of overall debt...debt's been increasing exponentially over the last few years, yet the bond market has been flat to slightly no growth. Something about that seems sketchy...

    As far as home prices falling to pre-recession levels, that is a farce in expression that DC (Keynesian) economists have peddled with amazing marketability. After a bubble, market economics doesn't call for a return to prices right before the burst, think how ludicrous that idea would be for any other asset! What it calls for is a return to pre-BUBBLE level prices. We have not even come close to pre-2001 valuations (either by real price, or by price-to-income standards), there is a whole lot further for this thing to fall the moment the Fed lets off the QE pedal.

  • Report this Comment On May 03, 2013, at 11:35 PM, foolsall wrote:

    Lot's of smart people posting here. Interesting comments. I have to come down on the side of njusko. I would really like to see the figures on who is buying.

    Here's what little I know: Up to one year ago; 70%, of new Builds were Apartment Buildings, financed by the Wealthy; and supported by easy money from Big Banks. Secondly, there are many markets where home prices are still declining; i.e., Chicago, and other places like Arizona, Nevada and Florida. Michigan is struggling too.

    But, more to the point. There is no question that Investors are squeezing out, either, first time home buyers; or, those wanting to trade up. Anything under $175 - $200 Thousand is usually an Investor's Target.

    Here is how some of these Predator Investors play the game: They are almost always the first ones to get information about, short sales, foreclosures, and regular sales - - that, may be under priced. How can that be? Easy! Insiders - - and, I suspect, some sleazy Realtors or Bankers, pass on the information about something coming on the market. As a result, the Investors get to the property immediately; to be first in line. They are only interested in getting the signed contract, FIRST! How do they do that? By offering $20-30 Thousand Dollars over the set, or asking price. Homeowner, sellers are ecstatic; and, other Bidders; and, there can be several - - as many has 96 - - in one instance; just walk away - - thinking the Investor is Crazy for offering that kind of money, for THAT House! Let him have it!

    Anyone posting here, get it yet? The Investor says, "I really like the house, and the neighborhood; but, I am a business man too; and, the house MUST Appraise!

    Well, now you know the rest of the story. The House Fails to Appraise; other Bidders are long gone; and the Investor Purchaser will either negotiate a new sales agreement; or, absent that - - walk away. Seller is dismayed; and, if the Bank has it; they may be pissed - - unless they are part of the scam. Seller often times will agree to a price BELOW the advertised price in the first place. Then these Predators will slap some paint on the Walls; put in new - - but, very cheap carpet; and rent the place back to the very people in the area that lost their homes.

    This is clearly illegal and a violation of fair housing laws. For the Realtors who pass the information along to Investors: they get the Sale; and, don't have to do a damn thing! Consider a Listing Agent that passes on information about a house that hasn't even officially been put on the Market yet. By passing on the information about a "Steal of a Deal;" the Realtor stands to profit from BOTH ends of the transaction. In one Middle Size City out West; this, is happening repeatedly; and one can't help but wonder how widespread this practice is.

    You all probably know too; that Vulture (Venture), Capitalists will pool Millions of Dollars; and, go into an area and buy 50-100 -150, Homes at a time for 30-40 cents on the dollar; as, the Banks want to liquidate. Far cry from their position when the Bubble first popped. Think they found that they were no better at Real Estate, than they were at handling OPM . . . by making fraudulent, or stupid investments.

    Scans and Canadians, are very good at Neighborhood Sweeps. Somehow, they get timely info as well.

    There are so many, many other things that need to be said; but time and space is limited here.

    Just let me say this: Is this the New American Dream in this Country? The Rich are buying up everything - - which happens in a Depression - - and the rest are on a fast-track to the Poor House.

  • Report this Comment On May 04, 2013, at 2:07 AM, dsciola wrote:

    Well I'll admit I stand somewhat corrected :)

    hrmmmwhynot

    "It's all nice and academic to spew out theories and rhetoric, but what's happening in the real world usually doesn't reflect in the news until it's in the past. What's in the news now has been a steady tide rising since last year. They are way late to the game."

    Haha love that quote. Headline news is just that, useful for 1 day, then its irrelevant...and academic theory most definitely rarely works in real-world practice...too bad they didnt teach me that in college...

    Seems Blackstone is definitely getting bullish on RE per ur GOOG suggestion...

    http://www.tampabay.com/news/business/realestate/blackstone-...

    http://www.cnbc.com/id/100701436

    CNBC article above is from a day ago...a total $4.5B bet on RE equates to >2% of their $210B AUM, per Tampa Bay article...sure sounds like a lot, but in context of a large firm like Blackstone, not sure if its bubble-like #'s, despite their clear intention for yield as well in both articles.

    Also...

    http://moneymorning.com/2013/04/04/are-wall-street-buyers-li...

    I've read this guys article's b4 n think he makes some good points, especially above when he says

    "Just because institutional investors are thought to be long-term investors and can theoretically wait out any further bumps in the housing market, it doesn't mean they won't head for the exit doors all at the same time like they did with the mortgage-backed-securities they all speculated in....

    ...For my money, riding this wave is reminiscent of riding the appreciating housing train in the early 2000s. I'm going to follow the tracks of the institutional buyers until they reach their ineluctable end, at which time, I'm going to sell all my long positions and short everything once again....Everything is "tradable" now-even the houses in your neighborhood."

    I will add that calling houses tradeable is a little mis-leading...they're not quite as liquid as equities or exotic MBO's, CDO's, etc...but nonetheless, when the buying slows significantly and the institutionals start to exit, prolly time to exit...AAPL now is a great example here too as nearly all hedge fund players unloaded their shares over its decline since past fall 2012.

    FWIW, it seems like intstitutionals are just starting to fuel a potential bubble, so it does have some more room to run...but watch out for the drop.

    That city-data site is pretty cool too, when u say "Measure that and you can spot the bubbles." do u mean median h-hold income / median house or condo? For example in WA state, median h-hold income = $56,911, and median house/condo = $287,300, so income / house value = 19.8%, inverse of which is about 5x? Are either of those values bubble territory?

    njusko,

    How much new $$$ generated by QE? Well, a lot I guess...somewhere around $500B or so? Also, I'de have to disagree that bond mrkt has been flat, ZIRP and the Fed's bond buying via QE has been fueling bonds growth...mebbe not growing lock-step with overall debt held by the public (or whichever one acct's for bonds if Im getting my debt terminology right) but still growing I'de assume...why in first place does one have to measure bond mrkt relative to debt anyway?

    I guess u could argue that the idea then that 'investors' are in bonds is actually false since really its mostly just the Fed here, if Im not mistaken, so then that could explain why real investors are searching for yield elsewhere, e.g. Blackstone gobbling up rental properties.

    Good point on pre-bubble / keynesian farce...granted thats why I threw in the word 'relatively' for point 3 :). I dunno what 'real' value should be for houses / RE in general, but I do know that most ppl anchor and probably have still achored in their heads the mid/right at bubble prices, so then when the bubble bursts and prices collapse, opportunistic buyers see lower prices and thus start buying houses again, driving up prices again...back to another bubble then? Well, if prices racing ahead of 'real' value and valuations, then could be.

    Nonetheless, in theory, prices should return to and settle around pre-bubble prices and values instead of bubble-like prices and values...but again, theory doesnt always come to fruition in the real world.

    In my opinion, its pretty darn hard to determine what 'real' value is for houses / RE, since unlike stocks they dont generate any 'intrinsic' cash flow, sales, earnings like stocks do, even for rental properties.

    What I do know, or at least believe, is that housing was in a massive bubble, that massive bubble burst...so demand and supply deflated as well with prices...now demand seems to be coming back, supply then will be needed to meet that demand, whether by the average joe homeowner or by the bubble-causing speculator/PE firm/other institutional, so housing prices will rise until inventory meets demand...hence houses are selling in less than a week and with 20%-40% 'premiums' attached to em...

    in short, what hrmmmynot and njusko described in their 'hoods is just about exactly whats going on now in Seattle area too, along with houses only being on market for a week, from what I can tell, mainly due to a serious supply shortage post-bubble...

    Time will tell, and all the other wonderful factors, players, etc in the mix whether its real or another bubble...

    If u dont mind me asking, what's those pre-2001 valuations u speak of? Just real price / price-to-income valuations? Would be curious to learn more here, you got a link that elaborates on these and other housing valuations?

    Thanks for the thoughts and enlightening conversation...they definitely dont teach ya this stuff in school :)

    Dom

  • Report this Comment On May 05, 2013, at 6:59 AM, hrmmmwhynot wrote:

    dsciola:

    Yes, the price-to-income ratio can be measured by house price / income and you will get a multiple. In the 70's a healthy multiple was 2x. If you visit any affordable housing fact sheet the recommended ratio that anyone should be able to afford is 4x their income. So if you make $100,000 per year, you can comfortably afford a $400,000 house. Now, I don't imagine many average households making triple digits, but prices here are actually closer to $700,000 average. If you use price-to-income ratio you'd have to make about $175k annually as a household to afford that. We're talking loans here, so if you managed to save $700k all cash that would be different.

    Other indications are already written in history with Alan Greenspan's reduction in interest rates post 9/11. The strategy that the Fed is doing now has been done before with disastrous results. As soon as the Fed raised interest rates a few years in a row from an all time low of 1% in 2002 to 5.25% in 2006 homeowners with ARM loans got devastated and bubbles were revealed. Then we know what happened the following years in 2007 and 2008.

  • Report this Comment On May 16, 2013, at 8:39 PM, dsciola wrote:

    I see, so then based based on all that...

    ...assuming 2x is a 'healthy' price / income multiple, then one can draw the conclusion that a more than double state-wide multiple of 5x may demo that Real Estate, at least in WA, is currently overvalued...

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