Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging. Are all our eggs in the housing basket?
An open house for a five-bedroom brownstone in Brooklyn, New York, priced at US$949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for US$2-million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.
The U.S. spring homebuying season has been marked by a frenzy of demand fuelled by the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes. While values remain well below their peak, economists including Stan Humphries of Zillow Inc. and Mark Vitner of Wells Fargo & Co. assert prices in some areas are rising at an unsustainable pace — a dramatic shift from early 2012, when billionaire Warren Buffett said housing “remains in a depression.”
“It’s a big change from a year ago,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “You’ve gone from hearing horror stories about people losing money to hearing stories of frenzy — lots of traffic and multiple offers.”
U.S. home prices jumped almost 11% in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.
You’ve gone from hearing horror stories about people losing money to hearing stories of frenzy
The gains in some U.S. areas aren’t sustainable for a healthy market, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
“If prices keep going up at this rate for another six months, we will have a bubble, and people will get hurt,” he said in a telephone interview.
U.S. buyers spent three times their annual incomes on homes at the end of last year, and those properties were 15% pricier relative to incomes than before the housing bubble of the mid-2000s, according to data from Seattle-based Zillow. Markets such as Silicon Valley, Southern California, Boston and New York will look expensive relative to incomes when mortgage rates rise, Humphries said.
“The Fed has put every home on sale because of its actions,” Humphries said in a telephone interview. “We’re not saying you should ignore the sale sign and not pay a cheaper price. We want people to be aware of the fact that this is unusual and not bake these expectations of high appreciation into their long-term calculus.”
The average rate for a 30-year fixed mortgage was 3.51% this week, and reached a record low of 3.31% in November, according to Freddie Mac. That compares with an average rate of 6.24% from 2001 to 2006.
It’s too early to say another bubble is emerging. So far, the biggest gains are limited to hard-hit markets such as Phoenix and Las Vegas and thriving job centres such as San Francisco, while prices are falling in cities such as Chicago and Indianapolis, according to CoreLogic. Nationally, existing-home sales are about a third off a 2005 peak and home construction is down by 66%. Also, in contrast to the easy lending of the boom years, mortgage standards are strict.
In areas such as Long Island, New York, and Omaha, Nebraska, price gains are within moderate growth levels of 3% to 5%, according to the National Association of Realtors. In other cities, demand remains stagnant and the market is far from overheated.
Homebuyers in Erie, Pennsylvania, a port on Lake Erie in the northwest part of the state, are still finding plenty to choose from, said Debra Fries, a local agent with Coldwell Banker Select. The median home price in the area fell 5% to US$105,000 in the first quarter from a year earlier, according the Realtor group.
“We don’t have any bubbles,” Fries said. “We’re steady as a stream.”
U.S. home prices fell 35% from their July 2006 peak to the bottom in March 2012, and are still 29% off their high, according to the S&P/Case-Shiller index measuring 20 U.S. cities. Nationally, prices dropped so much during the crash that they remain about 7% undervalued, based on comparisons with historical prices, incomes and rents, Trulia Inc. said this week, introducing a feature on its website called “Bubble Watch.”
Still, the recent price surge has made eight U.S. markets — including Orange County, California; Houston; and Portland, Oregon — overvalued, the San Francisco-based real estate data company said.
The housing market has defied predictions of a tepid recovery by many economists. A year ago, Moody’s Analytics Inc. said prices in 2013 would climb 1.6%. The company revised its projections upward for each of the last six months and now expects an increase of 7.5% this year. Gains probably will moderate in 2014, said Celia Chen, a Moody’s housing economist who predicts a 4% rise as homebuilding ramps up and underwater homeowners regain enough equity to sell.
CoreLogic said today that it projects prices will rise at an annualized rate of 3.9% through 2017 after climbing 7.3% in 2012.
Of the 150 metropolitan areas tracked by the National Association of Realtors, 9 out of 10 showed price increases in the first quarter from a year earlier and areas such as Silicon Valley, California; Phoenix; Atlanta; and Reno, Nevada, saw gains of more than 30%, the group said. Prices declined in 17 markets, including Edison, New Jersey; Champaign-Urbana, Illinois; and Allentown, Pennsylvania.
“This is a good spring for sellers in a hurry,” Jed Kolko, chief economist for Trulia, said in a telephone interview. “Buyer demand is stronger than we’ve seen it in years and it’s been strong enough to lift sales despite tighter inventory.”
The buying frenzy was on display at a March open house in Brooklyn, a borough of New York City where the median price rose 14% to US$515,000 in the first quarter from the prior year as the number of listings plunged 45%, according to Douglas Elliman Real Estate and appraiser Miller Samuel Inc. Over two hours, 300 visitors streamed into a three-story brownstone in Crown Heights and it went under contract for more than the asking price less than a week later, said Barbara Brown-Allen, a Douglas Elliman agent who represents the seller.
The fear of losing out on mortgage rates that are close to the lowest on record is spurring the rush, Brown-Allen said. The up-and-coming Brooklyn neighbourhoods of Crown Heights, Bushwick and Bedford-Stuyvesant have surged in popularity during the past year because buyers have been priced out of Manhattan and more exclusive Brooklyn neighbourhoods, such as Park Slope and Cobble Hill, she said.
“It was a zoo — sometimes there were over 100 people in the house at a time,” Brown-Allen said. “Once the inventory is this short, you have a lot of people vying for the same properties.”
Even in markets like Boston, where CoreLogic put home-price gains at a moderate 8% in March, demand is high. Often, homes spend only one day on the market, said Cliff London, a broker with the RE/MAX Home Team in the suburban town of Needham, Massachusetts.
“By the time the first open house is over the offers are coming in, sometimes above asking price,” London said. “There’s a lack of quality inventory — that’s fuelling it.”
In much of the country, inventory has been drained by institutional investors such as Blackstone Group LP and Colony Capital LLC buying single-family homes, often foreclosures, to turn into rentals, said CoreLogic Chief Economist Sam Khater.
Blackstone, the largest buyer in the U.S., spent more than US$4-billion on 24,000 rental properties last year. The company recently bought 1,400 residences in Atlanta, the biggest bulk deal for the fledgling homes-for-lease industry. Such purchases helped to drive prices up 12% in March from a year earlier in Georgia, where values only rose 1.2% six months earlier, Khater said.
Appreciation in Arizona is moderating as investors look in other markets for better yields, Khater said. Prices in the state rose 17% in March from a year earlier compared with a 20% increase in September 2012, he said.
Vitner of Wells Fargo said investors are buying properties as quickly as they can and when they leave, housing will take a hit. Investors accounted for 19 percent of sales in the U.S. in March and even more in some former bubble markets, according to the National Association of Realtors.
“The problem is if they don’t earn a high enough return, they all walk away,” Vitner said. “Investors accounted for a larger proportion of the housing recovery than people realize.”
While the tightness in the existing-home market is driving up sales for new homes, homebuilders can’t increase production fast enough because of labor shortages and rising competition for lots in the best locations. There were 153,000 new homes available for purchase in March, just 10,000 more than a five- decade low in mid-2012.
In Menlo Park, builders are selling houses long before they’re completed, said Keri Nicholas, a Realtor with Coldwell Banker in the affluent Silicon Valley town. Land is in such short supply that they’re buying million-dollar homes to knock down and put up mansions, she said.
A three-bedroom house Nicholas listed for US$2-million last month received four offers from builders. It sold to an owner- occupant who paid all cash, she said.
In south Florida, 20 condominium towers with more than 3,300 units are under construction, according to Peter Zalewski, owner of Condo Vultures LLC, a brokerage and consulting firm based in Miami. Another 14,600 units are planned, about three- quarters of them for Miami-Dade County, where the crash left dozens of unfinished and failed condo projects, now mostly filled with renters, he said.
“I don’t think there’s any question that we’re in the early stages of the next great south Florida construction boom,” Zalewski said.
The conditions that have propelled prices up for the past year won’t last, said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania.
“We’re eventually going to see mortgage rates increase, supply increase, and affordability decline, so you probably cut price gains at least by half,” Naroff said. “It will be a slowdown, not a crash.”