Did you see the movie The Big Short about the run up to the housing crisis and the subsequent crash? Whichever side of the fence you are on in this debate read the book or watch the movie because with Redondo Beach home prices at all time highs Buyers are asking, "Is this another bubble?"
I'm not an economist just a Real Estate Agent but my response is no, not yet anyway. Here's some of my thoughts and observations.
ROBERT SHILLER: "We're Not In A Housing Bubble.... Yet"
You know Nobel Prizewinning economist Robert Shiller, co-creator of the S&P/Case Shiller Index, the guys that were the go-to resource for where we were headed during the last implosion and still some of the most respected voices regarding the housing market. While he didn't coin the phrase "irrational exuberance" he did write a book of that name.
He thinks we're not in a bubble (yet). In fact, Shiller says there’s still some room for prices to run.
He recently said in a Yahoo interview on March 29, 2017:
“The price climb has been pretty steady since 2012. In a lot of cities, prices are up over 30%. I think people are cautiously optimistic.”
“It’s not bubble territory yet, but bubbles are always a possibility. Right now we’re sitting where we were in 2003, and that developed over the next three years into quite a bubble."
Taking a look at the broader picture, Shiller said that he’s concerned about recent volatility and “spectacular drops” in U.S. stocks and overseas markets, warning that further weakness could lead to a loss of confidence and cause investors to develop a “wait-and-see attitude.”
He’s also keeping an eye on the recent plunge in oil prices, saying it would be “worrisome if these fears return.”
HOMES ARE BEING BOUGHT TO LIVE IN NOT FLIP
Sure there are some flippers in the market and if you are a Buyer reading this who has lost out on multiple offers to investor flippers you might not feel the same way I do.
Here's what I am seeing.
The "casual" flippers are out of the market. In the previous run up we saw non professional speculators buying properties with the specific intention of doing short term flips.
Flippers these days are for the most part, well funded larger organizations who are often acquiring their flip properties directly from Sellers (off market) or through some other distressed channel. While there is a profit motive for sure, these are businesses not speculators.
What I am seeing, for the most part, are homes being sold to owner occupants. Which brings me to me next point.....
THERE IS A LOT OF EQUITY SHORING UP THE HOUSING MARKET
While we have seen the return of less than 20% down (non FHA or VA) loans over the past 24 months, for the most part Buyers today and home owners have substantial equity. What that means in a practical, pragmatic sense is that prices would have to drop substantially, possibly even 30% for the majority of owners to be "under water". And even if prices dropped, home owners will not be walking away and doing "strategic defaults" as long as they can hold on and pay the mortgage.
Because everyone needs somewhere to live, this situation is likely to persist as long as it is about the same price or even less expensive to own rather than rent.
HIGH RENTS MAKE HOME OWNERSHIP MORE ATTRACTIVE
Yes, not a type. For many properties assuming you have the down payment and credit, your monthly carrying costs may be about the same to own as to rent. Really.
Let's take an example.
Three on a lot Townhomes in North Redondo Beach may be renting now for around $4000 per month. Newer larger units might go for more and older and smaller ones for less. These same properties can be bought for around $850,000.
If the buyer puts down 20%, the mortgage amount is $680,000. With a 7/1 ARM the payment is $3149 for PI. Taxes will be another $800 month. There are some other costs for home ownership but I am not calculating any tax savings appreciation etc. (For a more detailed discussion of Rent vs Buy follow this link.)
But even if it is close, most people would rather own than rent because let's face it, the money paid to your landlord is just plain gone forever while a portion of your mortgage payment is allocated towards paying down your principle.
SINCE THE HOUSING CRASH UNDERWRITING STANDARDS ARE HIGHER
Some would argue too high! I think it was Ben Bernanke who could'd refinance his home when he was the chair of the Federal Reserve.
If you really want to take a deep dive read The Big Short by Michael Lewis or see the movie of the same name. There's no question that the financial system had systemically created a massive scheme of fraud that was being propped up by bad mortgages given to people who could ill afford them. It wasn't a question of if the system would collapse, just when.
So are we in another housing bubble? You tell me.