Has the Housing Market Reached Bubble Status Again?

Author: Tory Barringer March 31, 2014 0
Has the Housing Market Reached Bubble Status Again?


With year-over-year price increases continuing on a double-digit course despite recent slowdowns, the ever-present question has once again come to the fore for market commentators and analysts: Has the housing market reached bubble status once again?

The answer—at least, according to Trulia chief economist Jed Kolko—is both yes and no.

In the company’s latest quarterly Bubble Watch report, Kolko estimates national home prices are still around 5 percent undervalued when examining long-term fundamentals like historical prices, incomes, and rents. While ongoing improvements in prices have brought the market close to a tipping point, he notes that it’s far cry from the 39 percent overvaluation in the first quarter of 2006.

“Even though recent double-digit price gains look unsustainable, current national price levels are not cause for alarm,” Kolko said in a blog post. “Sharp price gains, like we’ve had in 2012 and 2013, are not the sign of a bubble unless price levels look high relative to fundamentals.”

Furthermore, “the slowdown in price gains make[s] it less likely that we’re heading for another bubble,” he added.

While the national market is still undervalued, conditions vary widely at the local level. According to Trulia, out of the 100 largest metro markets, home prices are overvalued in 19, including eight of the 11 largest California metros. The greatest danger is along the state’s southern coast, in markets like Orange County, Los Angeles, and Riverside-San Bernardino—which make up three of the five most overvalued markets in the country. (The two remaining slots go to Honolulu and Austin.)

While the number of overvalued housing markets is on the rise, Kolko again says historical perspective is needed: “In 2014 Q1, prices were overvalued in 19 of the 100 largest metros, which is the highest number since 2009 Q4; furthermore, prices were overvalued by more than 10 percent in 4 large metros, which is the highest number since 2008 Q4.

However, at the height of the bubble, all 100 were overvalued, and 91 were overvalued by more than 10 percent.”


CoreLogic: Home prices rose in nearly 90% of US metros in 2Q

home prices

Home price reports released this week show solid home price appreciation throughout the summer, but those numbers are expected to subside a bit as the market moderates on economic uncertainty.

The Standard & Poor’s Case-Shiller Home Price Indicesshowed average price growth of 12.8% in August, while CoreLogic’c Case-Shiller Indexes estimated a 10.1% increase in second-quarter home prices.

Both data sets show home prices on the rise even as mortgage rates begin to edge up across the country.

Some of this can be explained by ongoing investor influence and healthy growth year-over-year, Quicken Loans economist Bill Banfield said a day after the S&P data came out.  

“What we’re seeing is pretty decent year-over-year double-digit gains,” he explained, “but month-over-month, the numbers seem as if they have slowed a little bit.”

This slowing occurred in the transition from summer to fall and leading up to a controversial government shutdown that has been blamed for slowing mortgage processing and consumer confidence even further.

Yet, Banfield is not negative on prices cooling off a bit, as long as they maintain an upward trajectory over time.

“It’s a healthier pace in our opinion,” he added.

Banfield remembers rates rising in the summer after the Fed announced a possible tapering of mortgage-backed securities. “In the summer, interest rates went up a bit, you had an effective rate close to 5% and we are now at a four-month low on interest rates.”

Banfield acknowledged that rising rates in the summer “pulled some of the euphoria out of the purchase market.”

But to him, the latest numbers show a healthier real estate market even if it is cooling down a bit.

The CoreLogic Case-Shiller Indexes note that national home prices are 16% above the trough of the recession, while still 24% below peak levels reached in the first quarter of 2006.

CoreLogic also believes price appreciation will decelerate in the second half of 2013 and in the first part of 2014. The research firm says price appreciation overall is expected to slow to an average of 5.4% across most U.S. housing markets.

“Prices are now rising in nearly 90 percent of metro areas, and in all metro areas with populations greater than 1 million,” said Dr. David Stiff, principal economist for CoreLogic Case-Shiller. “The strongest growth continues to be recorded in cities that were at the center of the housing bubble, but investor demand in those markets appears to be waning, meaning rapid rates of price appreciation are likely unsustainable.”

Steering clear of a housing bubble is a positive development, and that’s what this cooling-off period suggests to some economists.

“The momentum has slowed, but it’s actually healthier,” said Banfield. “If this trend continues, you will see home prices continue to go up at a slower pace. Ultimately, I think that is better.”

He doesn’t see the market nearing a bubble, since the price declines month-over-month show some signs of moderation.

Going forward, Banfield sees the market coming back slowly, with year-over-year price growth receding back to the single-digits and month-over-month growth remaining modest.

He acknowledges that in the midst of price growth, the market is still seeing high concentrations of investors. “They are finding an opportunity to buy homes at lower prices, and then renting them out or rehabbing them,” he explained.

Still, CoreLogic’s second-quarter report notes that first-time and trade-up buyers are growing even as tight mortgage lending conditions slow demand within that segment.

Demand from investors – while still there – is starting to weaken, CoreLogic said. The reason for this is the profit incentive is declining with fewer homes listed at attractive prices.

Yet, CoreLogic believes the market is contained enough to ward off bubble risk or steep price losses. 

“Combined with increased housing construction, expected increases in existing inventories should restrain price appreciation even if demand remains strong. Nevertheless, the rate of home price growth in the coming months will remain above its long-term average of 4.5% annual appreciation since 1975,” said Dr. Stiff.

Rising rates have no effect on housing thus far

By Megan Hopkins

 • July 10, 2013 • 12:10pm

Compared to the 1980s, when mortgage rates hovered above 10%, today’s rates remain relatively low. In early May, the 30-year, fixed-rate shot up to 4.46%, before settling back to 4.29% last week, according to Freddie Mac

However, the recent pace at which they’ve been climbing has many potential homebuyers hesitant to buy a home. 

At the end of June, right after rates rose sharply, Trulia($33.12 -0.2%) surveyed more than 2,000 people to see what their biggest worry would be if they were to buy a home this year. 

Of all the consumers surveyed, 41% said their top fear is that mortgage rates would rise before they could actually buy a house. Second to rates, 37% of consumers said they were worried prices would rise before they could buy, and 36% said they wouldn’t find a home for sale that they like. 

So how high will rates have to get before consumers become too discouraged to buy a home? Among consumers who intend to buy a home someday, 13% said that mortgage rates of 4% were already too high for them to consider buying a home. Rates had already climbed to 4% at the time of the survey. 

Another 20% of consumers surveyed said they’d be discouraged from buying a home if rates reach 5%, while another 22% said they’d be discouraged from buying a home if rates reach 6%. Combining these groups, 56% of consumers who plan to buy a home someday would be discouraged from doing so if rates reach 6%. 

But are consumers right to worry about the effect of mortgage rates on housing costs? According to Trulia, yes. Higher rates will raise the monthly mortgage payment for a loan.

For example, with rates at 3.35%, the monthly payment on a $200,000, 30-year FRM is $881. However, once rates hit 4.46%, that payment jumps to $1009 — a jump of 14% in the monthly mortgage payment.

“This means a consumer can afford less house for a fixed monthly payment, which – all else equal – should reduce housing demand and home prices in the long term. In the short term, however, if consumers expect rates to rise further, some might rush to buy, which could boost sales and home prices temporarily,” said Jed Kolko, chief economist at Trulia, in a report. 

Surprisingly, the recent run-up in rates has not greatly affected prices or home-purchase mortgage applications as of yet. According to the Trulia Price Monitor, asking prices only rose 1.5% month-over-month in June. Additionally, the Mortgage Bankers Association index for home-purchase mortgage applications in June rose 2% month-over-month. 

“With price gains still going strong, there are few signs that the rise in rates will derail the housing recovery,” said analysts atCapital Economics

So why has the effect of rising rates on the housing market been limited thus far? Mortgage rates are rising alongside a strengthening economy, which is subsequently boosting housing demand. And while demand is on the rise, a tight inventory is forcing many would-be buyers to wait to buy. 

Additionally, rising rates could lead to expanded mortgage credit, as refinancing demand dries up. Banks might look to expand their home-purchase lending to replace the refinance activity they have lost.  

Barry Habib, chief strategist with Residential Finance, said he’s never experienced anything like what is seen here.

“In fact, it’s the largest percentage rise in interest rates and as rapid a period as we’ve seen in 53 years.”

Habib said he’s seen purchase activity drop slowly. When we see a normal lull is in July’s numbers. September’s numbers will be more telling, he said.

But demographics remain strong. The case for buying a home has never been stronger, with rent rising and affordability near its all-time best.

“You can make a strong case that housing should be strong moving forward,” he said. Habib noted that affordability is still 1% below the average for the past 10 years and 2% below what it’s been for 20 years.

Matt Weaver, senior mortgage banker at WCS Lending, told HousingWire that the main effect he’s seeing from the rise in rates is an increased sense of urgency. 

“The interest rate increase hasn’t affected any homebuyer that I’m dealing with at this point in time,” said Weaver. “Has it affected their amount of monthly payments? Certainly. But it hasn’t taken them out of the game.”

He added, “Because it happened so fast, it almost didn’t even allow enough time to think about ‘should I pull back and not look for a home?'”

Weaver said May 22 marked the start of the rate volatility. In fact, the mortgage banker said for the first two weeks in June, if he had a client come in to make a mortgage application in the morning, he would have to increase the interest rate on the application by the time the process was finished nearly an hour later.

Luckily, Weaver said he had not seen a transaction as of yet to where an interest rate stood in the way of making the purchase. 

“Going forward, from some of the studies that I read, I think that rates are going to take a much more gradual approach as opposed to this erratic behavior we’ve been seeing,” he said. 


CoreLogic: Housing recovery is durable, but not bulletproof

By Megan Hopkins

 • June 19, 2013 • 9:51am

The trend of rising home prices continues and is expected to carry on, but don’t expect double-digit gains as a norm, analysts say.

Home prices rose 12.1% in April, making it the 14th consecutive month of year-over-year increases, according to the latest CoreLogic Home Price Index. This is the largest annual gain since February 2006, a clear sign of a market in recovery mode.

However, double-digit gains are also cause for some concern, say experts who recall the unsustainable home price increases before the last housing downturn. 

“While our recent projected CoreLogic HPI indicates continued home price gains, bolstered by still-tight supply and strong demand, we expect recent double-digit gains to moderate as markets normalize,” said CoreLogic.

But has the damage already been done?

With some early post-recession investors in distressed single-family properties saying the market overheated and they’re pulling back, it appears a sudden shift is taking place in the market. 

Although home prices have risen significantly these past few months, the housing market is still more than 20% below the April 2006 peak and several important factors could moderate rising prices.

Although rising home prices have created fear of another bubble, they have also helped 2.4 million underwater borrowers since the last quarter of 2011.

“Regaining equity creates options for those who might now consider selling their homes because they can close a transaction with enough cash to make a down payment on the next home,” said CoreLogic. “Higher prices also attract the interest of builders who see opportunity in increased demand. In both cases, a broader supply brings inventory more in balance with demand.”

The current January to April year-to-date increase in the supply of existing homes is the third highest in nearly 30 years, indicating a lessening in the inventory crunch.

“The increase in the supply in context of current tight underwriting standards should deflate the risk of any bubbles,” said CoreLogic.


Trulia: Home Price Recovery Not Shaping into Another Bubble

While home prices are rising today nearly as fast as they did during the peak bubble years of 2005 and 2006, Truliareassures “bubble-phobes” that they can rest easy in its latest report.

The company tossed its two cents into the bubble debate with the release of Trulia Bubble Watch, a report that compares various price indexes (including Trulia’s own Price Monitor) to per-capita income and rent data obtained from government releases.

According to Trulia’s findings, home prices are still 7 percent undervalued nationally, having come down from a peak of 39 percent overvalued in 2006. After the bubble burst, prices fell to being 15 percent undervalued at the end of 2011.

With prices still undervalued relative to fundamentals, Trulia insists that today’s rapid improvements still qualify as a rebound, not a new bubble.

“Home prices fell so much after the last bubble burst that they still remain below normal levels even as prices rise sharply today,” explained Trulia chief economist Jed Kolko. “Several forces are waiting in the wings that should slow down today’s rapid price gains before they rise into bubble territory again. More inventory, higher mortgage rates, and fading investor activity would each take home-price gains down a notch.”

That said, it’s still important to remain cautious. According to the report, eight of the country’s 100 largest metros are showing evidence of overvalued prices, including four in California (including Orange County, Los Angeles, San Jose, and San Francisco) and three in Texas (Austin, San Antonio, and Houston).

“Although we’re far from bubble territory today, there’ll be another home-price bubble someday, somewhere,” said Kolko said. “The history of American real estate is full of speculation, bubbles, and busts. Even now, most people expect home prices to get back to the peak of the previous bubble again in the next 10 years. Prices may be far from bubble levels today, but we need to stay on guard for signs of the next bubble.”



Fannie Economists Project 1.8M Borrowers Could Regain Equity in 2013

The broadening housing recovery has firmed up home prices around the country, with the potential to restore many underwater mortgages to a position of positive equity, according to Fannie Mae’s Economic and Strategic Research (ESR) group.


Citing data from CoreLogic, Orawin Velz, Fannie Mae’s director of economic and strategic research, notes that 1.7 million properties moved from negative to positive equity last year. Provided the home price gains seen so far this year continue, Velz anticipates another 1.8 million properties will rise out of their underwater positions by the end of 2013.

In a new commentary piece entitled “Down But Not Out: Many Underwater Borrowers Will Likely Regain Buoyancy This Year,” Velz examines the extent to which home price appreciation can lift underwater properties into positive equity positions and the anticipated recovery time for transitioning the nation’s housing markets toward “normal” activity.

“The first annual rise in home prices on a national basis in six years has contributed to a positive feedback loop for the housing market by helping many underwater homeowners … regain their positive equity positions,” Velz said. “This improving trend should help spur mobility and housing turnover….The broader economy also should benefit.”

Main measures of home prices showed continued robust gains through the first part of 2013, thanks to an improving labor market, low mortgage rates, and very lean inventory—which Velz contends has been the principal driver of price gains so far.

She says rising home prices should help some homeowners who have involuntarily remained on the sidelines to put their homes on the market. According to CoreLogic’s data, the number of underwater residential properties peaked in the fourth quarter of 2011 at 12.1 million and declined in each quarter of 2012, with 10.4 million properties remaining in negative equity by year-end.

About 3.7 percent of those—or 1.8 million—were in a slightly negative position, which Velz defined as those with loan-to-value (LTV) ratios of 100 to less than 105 percent. She says these properties may switch to positive equity positions this year assuming home prices continue their upward trend. Based on CoreLogic’s latest negative equity report, the share of properties with a slightly negative equity position varied across the country, ranging from 1.3 percent in North Dakota to 5.4 percent in Georgia.

Velz concludes that all but about 10 percent of properties currently underwater will be back in positive territory within three and a half years. Most analysts expect home prices to trend up this year. Zillow polled more than 100 economists, housing analysts, and other industry experts in March. The consensus for median appreciation in 2013 was 4.8 percent, with only two respondents out of 117 indicating a decline.

Applying the Zillow survey’s consensus expectation for home prices—a cumulative gain of 17.5 percent between 2013 and 2016—and assuming continued amortization, Velz says most of the underwater properties at the end of 2012 would likely regain their positive equity positions by 2016—all except the most severely underwater, meaning those with LTVs of 120 percent or higher.

Underwater properties remain concentrated in a few states with those in the worst five states—Nevada, Florida, Arizona, Georgia, and Michigan—accounting for nearly a third of total underwater properties, according to CoreLogic’s assessment. Velz stresses the speed of the transition of underwater loans to positive equity positions is expected to vary regionally.

Nevada and Arizona are among the states with the highest share of negative equity properties, yet these states witnessed very robust home price gains over the past year, Velz points out. On the other hand, Michigan’s negative equity share is the lowest among the five worst states, but its home price appreciation has been the most modest.

Fannie Mae’s economic and research director also noted strong home price appreciation bodes well for California, which was consistently among the five worst underwater states until the second quarter of 2011. Since then, California has moved out of the worst five states, as its home prices troughed in the first quarter of 2011—much sooner than trends have demonstrated in other severely underwater states and much earlier than national prices, which didn’t witness a trough until 2012.

According to Velz, that rate at which underwater borrowers are elevated above the break-even surface will depend on the severity of their underwater conditions—or their LTV ratios—and the pace of home price gains in specific markets.

The home bidding wars are back!

multiple bids real estate market

The competition has been most intense in California, where 9 out of 10 homes sold in San Francisco, Sacramento and cities in Southern California have been drawing competing bids.


The bidding wars are back. Seemingly overnight, many of the nation’s major housing markets have gone from stagnant to sizzling, with for-sale listings drawing offers from a large number of house hunters.

In March, 75% of agents with broker Redfin said their clients’ offers were countered by rival bids, up from 56% who said so in late 2011.


The competition has been most intense in California, where 9 out of 10 homes sold in San Francisco, Sacramento and cities in Southern California drew competing bids during the month. And at least two-third of listings in Boston, Washington D.C., Seattle and New York generated bidding wars.

“The only question is not whether a new listing will get multiple bids but how many it will get,” said Kris Vogt, who manages 14 Coldwell Banker offices in the Sacramento area. One home in an Elk Grove, Calif., subdivision recently received 62 separate bids. The final sale price was for more than $150,000, well above its $129,000 asking price.

In Cambridge, Mass., two condos that could be combined into one large home hit the market two weeks ago for $800,000 each, according to Pat Villani, president of Coldwell Banker Residential Brokerage in New England.

“The brokers stopped taking names after the number of bidders reached 250,” she said. The winning bidder offered $2 million for both units.

Related: Five best markets to buy a home

Homebuyers eager to purchase before home prices and mortgage rates rise are finding few homes for sale as sellers hold out for better deals, said Glenn Kelman, Redfin’s CEO.

Many homeowners are still underwater, owing more on their mortgages than their homes are worth, and they want to wait until selling becomes profitable again. By doing so, they can avoid short sales, which carry big hits on credit scores, 85 to 160 points, according to FICO.


“Many people have been holding on for a profit and they’re just now getting their heads above water,” said Kelman.

Those who want to sell and buy a new home are encountering a market where it’s difficult to find a new place of their own, said Vogt.

Related: Five best markets to sell a home

Over the past few months, Jackie and Cliff Kaufman have bid on four different homes in St. Petersburg, Fla., including one short sale and a foreclosure.

The pair, who have two adult children and run an online jewelry business, said they bid $5,000 more than the $495,000 asking price on the first home they had their eye on and never heard back from the seller’s agent. They were later told the house sold for nearly $550,000.

Next, they bid on a short sale listed for $600,000. This time, they came in $10,000 above the asking price and again, they were beaten out. The house was only on the market for two days.

The third attempt to make an offer on a bank-owned property was also met with silence.

Related: Buy or rent? 10 major cities

“It was very frustrating,” said Jackie Kaufman. “We felt we were always on the outside of the loop and that people who won the homes had the inside track.”

By the fourth try, the couple successfully bid through a listing agent, who they believe pushed their bid harder in order to earn a double commission since she was representing both the buyer and seller in the deal. And they managed to get the place for $30,000 less than the asking price.

They were lucky. Inventories of homes for sale continue to shrink. In February, the National Association of Realtors reported a 19.2% decline in inventory year-over-year. While the number of homes for sale should rise with the onset of the spring selling season, housing inventory is expected to remain low, pushing prices higher.

Related: Fastest growing boomtowns

And new home construction, especially in markets hit hard by the housing bust, is still moving forward at a snail’s pace, since the cost to build the homes is often more than what the property ends up selling for, said Jeff Culbertson, president of Coldwell Banker’s Southern California operations.

Even though home prices are on the rise, the balance between buyers and sellers has been thrown off balance, said Kelman.

“With buyers out in force and sellers cautious, the market is in an awkward ‘tweener’ phase,” he said. 

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