By Ryan Carter
- 8z broker Ryan Carter analyzes whether housing boom will turn into a bust.
- Booms are common, but busts are rare, Carter notes.
- Housing bust isn’t likely, Carter concludes.
Home prices in the U.S. have increased for 40 straight months according to data provider CoreLogic.
Colorado home prices have surpassed the peak prices attained in the sub-prime bubble and are at record highs.
Clearly, real estate is booming.
But will the boom lead to a bubble that eventually bursts? We will examine the difference between a boom and a bubble in this month’s newsletter, but first the market stats.
The volume of real estate sold across all Front Range markets in July increased 5.9 percent on a year-over-year basis.
An increase in new listings caused inventory levels to increase to 1.8 months.
A larger selection of homes, even if ever so slight, is a welcome sight for fatigued buyers, many of whom have made multiple offers, only to lose out
That said, we have to keep in mind that while 1.8 months of inventory is an increase, but it is still well below the six-month market that indicates a balanced market between buyers and sellers.
In the Denver County market, sales volume increased 8.9 percent on a year-over-year basis in July. The supply of available homes increased to 1.3 months.
So is a bubble forming, or are we just experiencing a boom?
“Booms” are historically common elements of typical 7-10 year real estate cycles in which prices increase for a period of 3-6 years, and then level off or fall slightly as incomes “catch up” to home prices.
“Bubbles,” on the other hand, are historically rare events in which a unique set of conditions combine and defy the real estate market fundamentals of supply and demand.
The U.S. real estate market has arguably experienced only two bubbles since the late 1800s (when accurate housing data began being recorded).
The first bubble popped during the Panic of 1893.
Of course, we all know when the second bubble occurred at the start of this century.
In the 100+ years between those two events, the market experienced seven real estate booms characterized by double-digit appreciation in inflation-adjusted real dollars.
At this point in the cycle, the market fundamentals indicate that we are not headed toward a bubble, and certainly not a repeat of the sub-prime bubble.
- Buyers can actually pay their mortgage, even if prices fall. Lending standards today are much stricter than they were in the heady days of the previous bubble when buyers were able to secure financing and purchase homes with no intention (or ability) to service the debt. In the subprime bubble, the preferred way to pay the mortgage was simply to flip the house for a higher price, which leads to the second fundamental difference.
- Buyers plan to live in the homes they purchase. Today’s homes sales are predominantly owner-occupied transactions. Investors who swooped in after the crash to find bargains are becoming less and less prevalent in the market as evidenced by the declining percentage of cash sales.
According to Core Logic, cash sales reached their lowest level in July since 2008.
And many of those cash sales are not investors, they are primary residence buyers coming in with cash to strengthen their bid in a multiple offer situation. Furthermore, even investors are holding onto their purchases rather than flipping due to rapidly increasing rental rates.
- Threat of oversupply is non-existent.
The first two differences involve the demand side of the equation, but the supply side also does not signal a bubble.
Bubbles burst and prices collapse when demand evaporates and an over-supply of homes flood the market.
As prices rise, more homeowners will decide that it’s a good time to sell, causing an increase in supply that will put downward pressure on prices.
That is a healthy market response and part of the typical real estate cycle, not a bubble.
David Blitzer, Managing Director of the Case Shiller Home Price Indices, one of the few organizations that accurately predicted the last bubble and certainly no housing cheerleader, may have summed it up best when he said: “There is no bubble to be anxious about.”
You can contact Ryan Carter at Office: 303.543.3083, Mobile: 303.332.3611. You can learn more about him at Ryan Carter.
Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. DenverRealEstateWatch.com is sponsored by 8z Real Estate. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.