I haven’t posted anything on this blog in a while what with writing for dwightjohnston.com, the California and Nevada Credit Union Leagues, and Callahan, but I thought I would post a few thoughts on housing. The next few weeks will be very interesting. The crisis point in Europe I have been expecting could be in the early stages. All bets are off then on everything, including housing.
Last week we wrapped up the months various housing reports with Existing and New Home Sales numbers. Both of those continued the trend of modestly more positive news in housing. As I’ve written in the past, I believe this is the year we can finally say the housing market bottomed and began a slow, gradual turn. But the challenges ahead aren’t insignificant. Incomes are not growing and most mortgages require substantial down payments. Additionally we don’t know how much supply will hit the markets from foreclosures this year and the next. The landscape for housing in indisputably better, but I fear that some of the articles appearing now might be misleading and encourage people to leap into the housing without weighing all the pros and cons.
I had to check my calendar recently to make sure I didn’t travel back in time after seeming some stories on housing. Over the past couple of weeks several leading newspapers have written stories about bidding wars breaking out over houses. The stories divide into two camps. On one side, the wars are over the shrinking supply of distressed homes as investors try to top each other to buy these properties. While it’s a good thing to see inventory leave the market, more is coming and we don’t know for sure if the investor crowd will remain so ravenous. But, more importantly, these articles often leave a false impression of what is really going on. They fail to report that the wars are mostly all cash bidders, but more importantly they fail to point on the reality of the sale prices. Some articles cited gains of 20% or more in areas in Florida and Arizona. That sounds fantastic until you look at reality. As an example, one county in Florida reported the median home price rose from $90,000 to $111,000 in just one month! Fantastic, right? But the records show that the median home price in that same area was $294,000 in 2006. The articles fail to point that out. So beware the hype about percentage price gains. It’s easy to make the gains look good when they are coming off such a low base number. Don’t get caught up in the hype.
The second type of battleground for bidding wars is occurring in some the priciest areas of the country. In the Silicon Valley homes are bringing multiple offers as the latest round of high tech bubble money is flooding the area. Other areas, such as Beverly Hills, are also seeing the bidding war phenomenon return. These areas are still crazy expensive, but the current prices are considered bargains. Homes that might have sold in 2006 and 2007 for $5 million or so are going for $3.5 million. Get ‘em while they’re hot! Here is what got my attention. One very happy realtor said he had not seen this sort of frenzied investor activity for homes since 2006 and 2007! Hmm. Are bubble signs already popping up?
The point of this discussion is that we’re beginning to read articles that make it sound like there is a new housing boom going on, and you’re about to miss out. The articles read as if they have been written by realtors. The accounts do make good headline fodder after years of relentless negativity on housing, but don’t let these sunshine reports influence your personal decisions. Rates are very low, which is a huge plus, and if you need and can afford a home in your preferred area it’s not a bad time to consider it. But do not get caught up in the hype and live to regret it. That happened to a few million people just five or six years ago. The housing market is far from fully healed. Investor activity is disguising what is really still a market in a nascent recovery. The frenzy will run out of energy long before the market runs out of houses.