Are Rising Home Values Creating A Real Estate Bubble?
Is America heading for a new real estate bubble? It’s hard to imagine, given the increasing home values in recent years. Housing markets are obviously making a strong recovery since the mortgage meltdown of a decade ago. But then again….
What Goes Up…
There’s no doubt that the housing sector has been going full tilt for some time. The National Association of Realtors (NAR) reported that February existing home values were up 7.7 percent over the previous year. In fact, February was “the 60th consecutive month of year-over-year gains.”
Not only are prices up, so are sales. During the past year existing home sales for February were 5.4 percent higher.
The story is much the same with new homes. According to the Census Bureau and the Department of Housing and Urban Development, new home sales in February were 12.8 percent higher than a year earlier.
The usual disclaimer from Wall Street is that past performance does not guarantee future results, a disclaimer which surely applies to real estate.
…Might Go Anywhere…
The fact that the market now looks rosy does not tell us how things will be down the line. In fact, when we look toward the future, there are several concerns to consider.
First, while home values have been rising in cash terms, a careful look at the numbers suggests a little caution is in order. According to the NAR, the typical pre-owned home sold for $228,400 in February versus $217,400 in March 2007.
However, when corrected for inflation, a dollar in 2007 was worth more. According to the Bureau of Labor Statistics, you would need $255,420 in today’s dollars to buy as much as $217,400 purchased in 2007.
You can look at these numbers in two ways: You can say that the cash value of real estate has risen during the past decade and you can also say that today’s existing home prices are actually cheaper than 10 years ago in terms of buying power. Both statements are correct.
Second, you can’t look at real estate without noticing mortgage rates. Rates have been depressed for almost a decade.
A 2013 report from Standard & Poors found that mortgage rates over a 40-year period had averaged 8.6 percent.
According to Freddie Mac, 2016 saw the lowest annual mortgage rates on record, just 3.65 percent. Mortgage rates in early April were higher, perhaps around 4.10 percent for prime financing, but compared with 8.6 percent today’s rates remain an outright bargain
Combine home prices, corrected for inflation, and mortgage rates at less than half their average, and it would seem that now is a very good time to buy and refinance real estate. Why then any worries of a real estate bubble?
The Real Estate Bubble
To have a positive real estate marketplace, you need good prices and mortgage rates. We certainly have those. However, you also need a strong underlying economy, one with lots of jobs.
The April jobs report was a bummer. While the unemployment rate was down, the country only produced 98,000 non-farm jobs in March, less than half of the 225,000 jobs added to the economy in March 2016. One sour monthly report does not make an economy, but it is something to watch.
Unfortunately, there’s a lot to watch on the jobs front. The use of artificial intelligence – AI – is a growing threat to job holders.
While robots have become common in manufacturing, we are now seeing the early use of AI in such areas as automated driving, basic legal work, pizza-making, and even anesthesiology.
According to one estimate, more than 45 percent of the job base could be replaced by automation in the coming two decades.
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