Once upon a time there were two shamans in a tribe. They both tried to predict how bad the upcoming winter would be. One threw rabbit bones and predicted a harsh winter. The other threw squirrel bones and predicted a mild winter.
The winter was mild, thus proving that throwing squirrel bones was a more accurate way of predicting the weather.
In an unrelated note, there is some speculation that we might be starting to inflate a new housing bubble, as prices are rising more quickly than is typical.
So, are we? Is there a bubble growing?
There are people who insist either yes or no, and have the
bones data to prove it. I’m not going down that road. But it’s worth considering the
Nope, don’t worry
Rises and falls aren’t the same as bubbles and crashes.
What we’re seeing now are prices rising naturally. We just came off a huge bubble bursting (in case you missed that bit of news). We hit bottom and now we’re recovering — that means prices are going to go up. Government incentives are speeding that recovery, making it seem like a bubble.
Remember, prices will rise and fall based on supply and demand and a lot of other factors (unemployment, consumer sentiment, etc.) — that’s economics for ya. So this could just be a normal rise… and it may me followed by a normal fall. That doesn’t make it a "bubble" any more than the ensuing price drops will be a "crash." Ups and downs are normal.
But this isn’t a normal market, is it?
Prices are rising too fast. In a normal, "organic" market, they would gently swing back and forth — buyers’ market, sellers’ market, and so forth. What we’re seeing now is the next bubble inflating.
Now homebuilders aren’t worried at all — they practically scoff at the idea of a bubble. Why? Affordability. NAR’s Housing Affordability Index (HAI) shows that the typical family can comfortably afford the typical home. In fact, Ara Hovnanian, CEO of homebuilding giant K. Hovnanian Enterprises told the Wall Street Journal that affordability was “the ultimate reality check."
But there’s a tremendous — and obvious — hole in that logic. When the housing bubble burst and the economy crashed, the HAI shot up. According to the HAI, homes were incredibly affordable when the market crashed.
So why weren’t millions of people rushing to buy homes then? Because the HAI has a very narrow field of view. It ignored the fact that unemployment had skyrocketed, consumer confidence was in the dumps, and people couldn’t get a mortgage. But heck, housing was affordable!
So when builders point to affordability as an indicator that we shouldn’t worry… well, it’s more complicated than that.
There’s another issue to consider: What drove the recovery. In many markets, it wasn’t individuals scooping up great deals with low rates. It was investors taking advantage of tons of low-priced foreclosures and bank-owned inventory. The deals were great, and many single-family homes thus became rental properties.
Nothing wrong with that, of course. (Probably.) Here’s the issue: What’s the long-term plan for these new landlords? Two major possibilities:
A. They’re going to stick to the business of rentals, and derive a nice income from tenants for the foreseeable future.
B. They’re going to be landlords until prices rise enough that they’ll do better to sell the properties at a solid profit.
Now don’t get me wrong — I’m not saying that these are Bad Things that Must Be Stopped. I’m saying that we should at least be aware of the potential consequences of so many homes having become rentals.
If most investors choose option A, that’s going to keep those homes off the market for the long term. Is that kind of long-term inventory reduction a good thing? Discuss.
If most choose option B, rising prices will means a heck of a lot of homes will be put on the market. At the moment that might be good, especially in places where lack of inventory is a problem, but it will also push prices lower. How much lower? Who knows? Will that be like a bubble bursting, or will it be a normal market swing? Again, who knows?
The reality is, we may be in another bubble, and that’s worth keeping an eye on. (Not that we can do all that much to stop it.) But the key word is "may." We’d be remiss not to consider the possibility, right?