This Is No Housing Bubble

Housing Bubble. Image courtesy of graur razvan ionut / FreeDigitalPhotos.net

Home prices are rising at a more rapid pace than they were just a few months ago, as demand outpaces supply. Existing-home sales surged 9 percent year-over-year in March and home prices were up 8 percent over last year, according to the National Association of REALTORS®. What’s more, with tight inventories plaguing many markets, the median list price in March climbed 11 percent over last year, reaching $220,000, realtor.com® reports.

With home prices heating up again, could the housing market be heading for another bubble?

“During the peak years of the housing bubble, from 2003 to 2005, the data on supply versus price appreciation looked very similar to what we are seeing now,” writes Jonathan Smoke, realtor.com®’s chief economist, in recent commentary at the site. “But there are key differences, which is why I’m confident that on the national level, this is no bubble.”

Smoke says these home price increases will stick because the market is correcting for severe price declines in the recent past. Prices rose 7 percent and 12 percent in 2012 and 2013, respectively. Median prices have climbed less than 8 percent on a compounded annual basis over the past three years. On the other hand, from 2002 to 2005, median prices rose 10 percent on a compounded annual basis – and had no justification of a bounce from a prior decline, Smoke says.

“On an inflation-adjusted basis, we are 30 percent beneath the peak set in 2005,” Smoke notes. What’s more, “relative to rents or incomes, median home prices are not ‘unhinged’ from long-term averages,” Smoke writes. In 2005, the price-to-rent ratio was 35 percent higher. Currently, the price-to-income ratio is where it was in 2001 and it is about 30 percent below where it was in 2005.

Smoke also notes that during the housing bubble, mortgage financing saw rapid expansion, and flipping activity based on speculative investing soared—neither of which are occurring now.

“Today’s higher prices are only to be expected as the economy improves and first-time buyers gradually return to the market,” Smoke writes. “Eventually, those higher prices should encourage more owners to list their homes and builders to start construction on new housing—which in turn should solve the problem of supply.”

Source: “Home Prices Are Climbing Faster and Faster, but This Is Not a Bubble,” realtor.com® (April 24, 2015)

$40 Million Homes Spark ‘Copycat Effect’

$40 Million Homes Spark ‘Copycat Effect’. Image courtesy of franky242 / FreeDigitalPhotos.net

Homes prices at $40 million or more were almost nonexistent up until a few years ago. Now, the nation’s priciest homes are selling for well above $100 million, and listings and sales at $40 million are surfacing across the country, The Wall Street Journal reports.

“We’ve had this creation of a new market category unlike anything that’s ever been seen before,” says Jonathan Miller of Manhattan-based Miller Samuel Real Estate Appraisers. “Five or 10 years ago, a $40 million sale or listing was an outlier. And today it’s almost commonplace.”

More than 300 homes were for-sale over the past year priced from $35 million to $49 million – a 24 percent year-over-year increase, according to Trulia real estate data.

Several factors are behind these “super-luxury home sales,” says Miller. He cites the creation of global wealth since the economic downturn, demand from overseas and domestic buyers, and the “copycat effect.”

When big-ticket sales occur on the market, they tend to generate a copycat effect where other sellers place their homes on the market believing they can also fetch ambitious prices, Miller told The Wall Street Journal.

Still, “the vast majority of homes over $5 million don’t fly off the shelves the way people want you to believe they do,” says Leonard Steinberg, a real estate professional with Compass. Steinberg is co-listing a townhouse that was originally listed in October for $48 million, and is now priced at $46 million.

More buyers may be willing — and able — to pay for homes in the $40 million price range today than there used to be but these buyers still tend to be very particular in what they want in their home, Steinberg says.

“People take their time at this price level,” Steinberg says.

Source: “The New Price of Luxury: $40 Million,” The Wall Street Journal (April 23, 2015)

Equity Rich Are Feeling Stuck…

Equity Rich Are Feeling Stuck… Image courtesy of ddpavumba / FreeDigitalPhotos.net

Even home owners who are “equity rich” aren’t necessarily in any hurry to sell and cash in.

The share of equity rich residential properties – those with at least 50 percent of positive equity – stood at nearly 19.8 percent by the end of the first quarter, up slightly by 0.2 percentage points year-over-year, according to RealtyTrac’s U.S. Home Equity & Underwater Report.

But in some markets, the rise of equity rich properties isn’t translating into more listings. For example, in Seattle, 21 percent of home owners are equity rich – yet Seattle has the lowest months of inventory in the city’s history, says OB Jacobi, president of Windermere Real Estate.

“These positive equity numbers simply aren’t converting to new listings because there is nowhere for sellers to move,” Jacobi says. “What we have in Seattle is your typical chicken and egg situation, and for now, there’s no end in sight.”

Indeed, “we have turned from an equity problem to an inventory problem,” says Heidi Greer, broker at RE/MAX Alliance in the Denver market. “A majority of sellers are hesitant to sell for fear they will not be able to find or secure a replacement home. New construction will help to relieve some of the pressure although only in the mid-to-higher price ranges, not the affordable sector. Unless a property is outside the window of demand, equity is not an issue, with a large number of homes being sold for thousands over list price and with no simple contingencies such as inspection and appraisal.”

The following major metro areas had the highest percentage of equity rich properties at the end of the first quarter:

• San Jose, Calif.: 43.7%
• San Francisco, Calif.: 38.6%
• Honolulu, Hawaii: 36.2%
• Los Angeles, Calif.: 32.2%
• New York: 31%
• Pittsburgh, Pa.: 29.7%
• Poughkeepsie, N.Y.: 28.3%
• Oxnard, Calif.: 27.7%
• San Diego, Calif.: 27%

Source:”U.S. Home Equity & Underwater Report, First Quarter 2015,” RealtyTrac (April 23, 2015)

‘Underwater’ Homes Inch Up in First Quarter

‘Underwater’ Homes Inch Up in First Quarter. Image courtesy of nattavut / FreeDigitalPhotos.net

The share of seriously underwater home owners took a surprising turn in the first quarter of 2015, posting its first increase since 2012. However, the number of seriously underwater home owners is still down more than 4 percentage points compared to a year ago, according to RealtyTrac’s U.S. Home Equity & Underwater Report.

At the end of the first quarter of this year, 7.3 million properties – or 13.2 percent of all properties with a mortgage — were known as “seriously underwater.” A homeowner who is seriously underwater has a combined home loan amount that is at least 25 percent higher than the property’s estimated market value.

RealtyTrac reports that the percentage of borrowers in this situation rose by 0.4 percentage points in the first quarter of 2015, compared to the fourth quarter of 2014.

“At the end of 2014, we saw the lowest share of seriously underwater properties since we began tracking such data, but in the first quarter that share bumped up slightly as home price appreciation continued to slow down in many markets,” says Daren Blomquist, vice president at RealtyTrac. “In addition, the data indicates more owners who have regained equity listed and sold their homes in the first quarter, cashing out on some of the home equity on the table in the U.S. housing market.”

On the other hand, most of the seriously underwater home owners remain “stuck in their homes as short sales and other foreclosure alternatives lose momentum, tilting the national home equity scales back slightly toward a higher share of negative equity,” Blomquist explains.

The following markets had the highest percentage of seriously underwater properties in the first quarter of 2015:

• Lakeland, Fla.: 28.7%
• Las Vegas, Nev.: 28.4%
• Cleveland, Ohio: 28.2%
• Akron, Ohio: 27.2%
• Orlando, Fla.: 26.1%
• Tampa, Fla.: 25%
• Chicago, Ill.: 24.7%
• Palm Bay, Fla.: 24.5%
• Jacksonville, Fla.: 24.3%

Source: “U.S. Home Equity & Underwater Report, First Quarter 2015,” RealtyTrac (April 23, 2015)

Home Buyers Push Up Loan Demand

Home Buyers Push Up Loan Demand. Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Mortgage applications were on the rise last week, as home buyers remain behind the upswing in demand. The Mortgage Bankers Association reported that applications for home purchases, viewed as a leading indicator of future home sales, rose 5 percent week-over-week on a seasonally adjusted basis for the week ending April 17.

Applications for home purchases are now 16 percent higher than the same week one year ago.

“Purchase applications increased for the fourth time in five weeks as we proceed further into the spring homebuying season,” says Mike Fratantoni, chief economist for the MBA. “Applications for FHA purchase loans remained strong as well.”

Overall, MBA’s mortgage application index, which reflects combined applications for refinances and home purchases, rose 2.3 percent last week. Applications for refinances increased only 1 percent last week but remain up 41 percent from a year ago due to lower mortgage rates. A year ago at this time, the 30-year fixed-rate mortgage was significantly higher, averaging around 4.25 percent.

The average 30-year fixed-rate mortgage has mostly hovered around historical lows for the past few weeks. Last week, it dropped slightly to 3.83 percent, its lowest level since January, MBA reports.

Source: “Mortgage Applications Rise 2.3%, Led by Homebuyers,” CNBC.com (April 22, 2015)

Economy Likely to ‘Spring Forward’

Economy Likely to ‘Spring Forward’. Image courtesy of sattva / FreeDigitalPhotos.net

Economic activity weakened in the first quarter of the year, mostly attributed to bad weather conditions across the Northeast and West Coast port disruptions. But the economy will likely gain momentum throughout the spring, which is expected to give a lift to the ongoing housing recovery, according to Fannie Mae’s Economic & Strategic Research Group.

“We have downsized our first-quarter economic growth expectations in light of several transitory factors that weighed on consumption,” says Doug Duncan, Fannie Mae’s chief economist. “Although some momentum was lost in the first quarter as consumers remained cautious in their spending, perhaps putting an emphasis on repairing their personal balance sheets and replenishing savings, we expect that consumer spending will catch up during the second quarter and continue in subsequent months, supporting our forecast of 2.8 percent growth for the year. We believe this momentum will carry over into the housing market, as well, particularly if strong consumer income growth continues.”

However, Fannie Mae economists caution that there could be some volatility, particularly with consumer spending and the financial markets, leading up to the Federal Reserve’s first expected rate hike in the coming months.

Source: “Q1 Economic Growth Measures Downsized, But Expected to Spring Forward,” Fannie Mae (April 20, 2015)