When considering the possibility of the housing market being “in a bubble,” add the thoughts of John Rubino, a market analyst with Seeking Alpha, to your mix of research and thinking.
Spoil alert…Rubino thinks, yes, the housing market is in a bubble. He goes beyond that saying the housing market is in Phase 2 of three phases of a bubble.
Here are Rubino’s three phases…
Phase 1
Rubino thinks two things, central banks and sellers, fuel housing bubbles. Central banks, in America’s case the Federal Reserve Bank, initially creates a source of liquidity or demand that encourages large numbers of people to buy. Think back to the housing crisis of 2008…the Fed’s response was to drop mortgage interest rates to historic lows to encourage people to buy houses. And guess what, after 6-8 years, people began buying houses again and now, the market in terms of price is “back.”
Sellers remember the peak of the market before it crashed. They remember what houses were selling for “before” and they’re not willing to sell for anything less now. To quote Rubino, sellers are “anchored” at the highest prices. This anchoring occurs at all price points, not just the highest.
The result…there are not enough houses for sale for buyers to buy. This lack of supply only becomes worse and worse and worse as demand picks up 2012-2014 and slowly, slowly, slowly buyer demand explodes to the point of that demand becoming desperate.
After all, interest rates are still low enough and they’ll never be this low again so we’d better buy now, right? And as buyer demand increases, the mortgage lenders become seduced by all this buying activity AND confident they can both scrutinize AND off-load any kind of dicey mortgage so they lower their standards to include everyone…again…just like before.
Phase 1 ENDS with price spikes and “extreme” deals in the hottest markets that actually generate headlines. You remember the headlines: “Sting Sells for $47.9M.”
This is where Rubino thinks the market is now.
Phase 2
All of a sudden, supply jumps. No, supply soars. According to Trulia, the supply of existing homes for sale in Q2 2018 increased 3 X the supply rate in Q2 2017. This jump is the largest in 3 years.
Even still, supply is down -5.3% compared with Q2 2017 BUT 1/3 of the nation’s largest cities (New York, Miami, Los Angeles, etc.) are seeing some relief.
Contrast this with San Diego, the metro with the largest inventory growth. Its inventory “growth” in Q2 ‘18 was 22% y/y compared to -28% in Q2 ‘17.
Rubino sees this supply jump as a double-edged sword. Essentially, supplies are increasing because sales are slowing and sales are slowing because prices are too high. For example, a buyer in NYC must spend 65% of her/his income to buy a house. In Los Angeles, a buyer must spend 59% of its median household income to buy a house/condo/etc.
Meanwhile, interest rates are beginning to rise (with two more increases already announced for this year) while mortgage applications for home purchases have fallen nearly -9% in June 2018 compared with June 2017, according to the Mortgage Bankers Association.
Phase 3
Deals are still getting done BUT the deals are made for the asking price or a little below, not in bidding wars. Days on the market turn into weeks and then into months. Sellers who had already in their minds cashed-out what they thought would be their profits begin to panic and cut their prices to get ahead of the market.
As a result, comps begin to dive and then subsequent panicked seller cut their prices even more. Sales drop (for now the third consecutive month), mortgage lenders get laid off and realtors are thinking. “Now what?” And then, and then, and voila, it’s back to the future of 2008.
I re-iterate…Rubino thinks that the housing market bubble is in Phase 1 at this point in time. He, nor anyone else, knows if/when Phase 2 or Phase 3 will come to pass.
I re-iterate again, pay attention.
