Econintersect: The Economist has reviewed the 20 largest US metro real estate markets and concludes data does not support the thesis that a new housing bubble is forming. From The Economist:
The verdict: in most markets houses are near or above their long-run values, but none looks bubbly. Price rises in Phoenix, Tampa and Miami have restored values only to their long-run averages. In Las Vegas they are still below that long-run average. Many things could trip up the housing recovery, from stalling job growth to higher mortgage rates; at the moment, a bursting bubble is not one of them.
Click to view interactive graphic at The Economist.
The conclusions by The Economist based on current average price snaphots of the largest US housing markets are not supported by several recent analyses published by Global Economic Intersection. The analysts have examined the data in wider context and examined trends.
Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), wrote the following in a GEI Analysis article just days ago:
The fastest rate of price increases can be found in many of the former bubble markets. Cities like Phoenix, Arizona and Las Vegas, Nevada are seeing very rapid rates of price increase, as are many of the cities of central valley in California. Prices in many of these cities have risen by more than 20 percent over the last year.
Furthermore the most rapid price increases are occurring at the lower end of the market. In Las Vegas the price of homes in the bottom third of the market have risen by more than 40 percent over the last year. In the last three months they have increased at almost a 70 percent annual rate.
There is a similar story in Phoenix where prices for homes in the bottom third of the market rose by just under 40 percent over the last year and have risen at just under a 50 percent annual rate over the last three months. Many neighborhoods in cities like Modesto or Vallejo are experiencing the same sort of run-ups in price.
These markets were all badly beaten up in the crash with prices falling back to levels not seen since the mid-90s. As a result, current prices in these markets are not obviously out of line with fundamentals.
However the concern is if these rates of increase continue. If a market is properly priced today, but follows the same path as the bottom tier of the Phoenix market and rises 50 percent over the next year, then it will be seriously over-valued in another year. Even worse, if one of these markets were to sustain the 70 percent rate of increase recently seen in the bottom tier of the Las Vegas market over the next year, then we could be looking at a market that is 70 percent over-valued.
Baker points out many sales in these rapidly escalating markets are by investors. If the price trends do slow to a much smaller rate (or reverse to negative), these buyers will dry up and these markets could quickly turn down. House flipping is not profitable unless house prices are in a strong uptrend.
Analyst Adan Whitehead has an ongoing series at GEI Analysis under the subject line “Housing Smoke and Mirrors“. Whitehead wrote in his most recent article:
We are coming to the conclusion that these regulations and reforms are nothing more than a return to the status quo during the bubble. This degeneration has been opined by Jeffrey Sachs[iii] and even the Special Inspector General of TARP (SIGTARP)[iv]; but these warnings have been lost in the price action.
Whitehead defines the driving forces over the past year to be dominated by comparisons in existing home sale to a base with a high percentage of distressed properties, a new securitization process for Fannie and Freddie to keep a stream of new mortgage backed securities (MBS) flowing into the Fed monthly purchase scheme (QE) and the increasing practice of banks retaining non-performing loans rather than completing foreclosures.
Real estate expert Keith Jurow has published analysis indicating that second mortgages are a market factor that is not properly appreciated for the damage they can do in coming years. His most recent article at GEI Analysis described how second mortgages and HELOCs (home equity lines of credit) are sabatoging mortgage modifiction efforts.
There are lots of complexities beyond the snapshot summary published by The Economist.
- Bubble-hunting (The Economist, 08 June 2013)
- Reality Check (Economist.com, 06 June 2013)
- Return of the Housing Bubble (Dean Baker, GEI Analysis, 03 June 2013)
- Housing Smoke and Mirrors (8) – “It Looks Ominous” (Adam Whitehead, GEI Analysis, 01 June 2013)
- New Mortgage Modification Program Can’t Stop Further Housing Collapse (Keith Jurow, GEI Analysis, 21 May 2013)