The Return of the Bubble?
Last August I wrote in this space “...the local citizenry does best without the roller-coaster cycles of housing prices. Bubbles can be exciting in the short term and while certain people make insane profits, in the end the hangover is very costly for the common weal.” While stories abound about bidding wars and frustrated buyers, I see little evidence of a speculative bubble forming.
It has been six years since the housing market collapsed. The real estate recovery that began in 2010 has lurched along and prices, while far below their historical highs set in 2007, have increased at a sustainable rate. Anecdotal evidence of bubble behavior certainly exists, but sporadic instances of buyer’s irrational exuberance does not make a market. Even though bidding wars are occurring and inventory is limited, market average prices are increasing only moderately. There are several reasons that argue for a continued moderate recovery, not a rapid increase in prices.
First, prices distortions have occured where there are spot shortages or a home has been priced under the market. A good example of a such a shortage occurred during this past March and April in North Mission Hills. At sporadic times during this period no properties were for sale under 1.3 million. The few homes that wandered onto the market priced below that number were immediately snapped up, usually at over list price. More than likely, these strong sales results will encourage owners to bring similarly priced homes on the market, restoring market equilibrium.
Second, spot sales notwithstanding, the Fed will not allow another speculative fueled by reckless lending practices. The housing market was rescued by the Board by maintaining a long period of very low mortgage rates. They can easily temper the effective demand for mortgages. If you doubt this, remember when Paul Volker, the Chair of the Fed in 1979, pushed mortgage rates to 17-18%. Prices in San Diego, up 25% a year in 1978 and 1979, increased a total of 4% from 1980 to 1984! I know Monetarism is dead, but there many other tools the Fed has to make homes loans very costly.
Janet Yellen, the new Chair, will likely carry on Ben Bernanke’s accommodative policies in regards to cheap housing money. Obtaining home loans will remain difficult, but mortgage money will be inexpensive for several years. The Fed is more worried about deflation than inflation. The Fed will keep moving the goal posts as the Board recognizes there remains excess capacity in the economy even as the recovery is technically 5 years along. Mr. Bernanke’s red line, 6.5% unemployment, has been rendered irrelevant for the time being.
More important to the housing market, 10-year treasuries have not reacted to winding down of Quantitative Easing. When the Fed began reducing monthly purchases of bonds and securities last year, 30-year mortgages got more expensive but not such much as to choke off buyer demand. The Fed is looking for the Goldilocks solution for this market, not too cold nor too hot. The market shrugged off the ¾% increase of fixed rate mortgages over the past year.
Third, the spring market is always the most active time in terms of contracts being made. Combining an unusual thin inventory has made for a pefect storm, the result being occassional price distorntions.
Finally, the overall data on the market indicate the recovery is maturing and we are in the transition space between a reocvery market and a longer term stable market. The county median home price increased 18% between March 2012 and March 2013. Prices move 12% the following 12 months. This year I think the increase will be approximately 7%, or 4% after inflation.
I have contended for the past several years that San Diego will return to a 1950s style market where appreication is roughly 2 to 3% over the rate of inflation. I do not believe the community income, coupled with the increased income maldistribution, will be able to providfe a broad-based push on prices. It is not unlike foreign adventuring, we cannot afford it any more. The health of the two million dollar market (except in areas where outside money drives the market, such as in Del Mar) is directly related to an entry-level buyer being able to enter the market. The City seems unable to provide enough lower-priced supply and the continuing problem of income inequality will evenutally impact the upper reaches of the housing market.
No matter how difficult the process, entry level consumers want to purchase property. Overtime there simply is no better game in town. The Fed is going to encourage that process as long as the speculator community is kept in its cage. Rates are still historically cheap and I see so much slack in the economy that rates will stay cheap over the next three year, even if the unemployment rates sinks between six percent. (U6?) Owning assets is the only way to keep on the right side of the inequality divide. Prospective buyers who doubt the wisdom of owning property should read “Capitalism in teh 21st Century” by Thomas Piketty.