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The KCM Blog - Housing Bubble: Is There a New One Forming?

May 29, 2013
Housing Bubble: Is There a New One Forming?
Posted: 29 May 2013 04:00 AM PDT
783773_thumbnailThe housing market is recovering so nicely that it has caused some to wonder whether a new housing bubble is forming. Today, we want to explain that the fear of a new pricing bubble in real estate is unwarranted.
Trulia revealed some great data on this point in a recent blog post. They explained that, even with the recent price increases, national home prices are still 7 percent undervalued. Trulia explained:
“Home prices nationally remain undervalued relative to fundamentals and much lower than in the last bubble. That’s why today’s price gains are actually still a rebound, not a bubble.”
Prices are below their fundamental value in the vast majority of the country (91 of the 100 largest metros). Even in the parts of the country that are now overvalued they come nowhere near the percentages we saw in 2006-2007. For example, let’s look at the two markets that are most overvalued today. In Orange County, California prices are currently overvalued by 9%. In 2006, prices in the region were overvalued by 71%! The second most overvalued market today is Austin, Texas at 5%. Texas real estate prices did not skyrocket as they did in many other parts of the country during the last boom. Austin prices were shown as being 12% overvalued at the time.
Again, prices are still undervalued in 91% of markets and, even in the markets that are overvalued, they are nowhere near the numbers of the 2006-2007 bubble.
Jed Kolko, Trulia’s Chief Economist, explained:
“So are we in bubble territory? No. Bubble-phobes can rest easy. Even with recent sharp home price increases, prices are still low relative to fundamentals and are far below bubble levels.”
Dr. David Stiff, chief economist for CoreLogic Case-Shiller agreed in a recently released report on prices:
“Even if double-digit price appreciation were to continue in former bubble metro areas, there is no reason to believe that new home price bubbles are forming. That’s because single-family homes in these markets are still very affordable, even after last year’s large price gains.”

Three reasons there will NOT be another bubble

Prices are determined by the ratio between supply and demand. Here are three reasons a bubble will be avoided.
  1. Supply is beginning to increase. A lack of inventory is creating a market of multiple bids which has caused prices to rise. The National Association of Realtors (NAR), in their latest Existing Home Sales Report, revealed that the months’ supply of inventory has increased from 4.3 to 5.2 months since January.
  2. Demand will decrease in certain demographics. For an example, investors have been a large part of the housing market over the last several years. As prices continue to rise, a certain percentage of these buyers will back off.
  3. As mortgage rates increase, buyers will be able to afford less. The Mortgage Bankers Association, Fannie Mae and NAR have all projected an increase in mortgage rates over the next year. Buying power will decrease as borrowers can no longer afford the same price point as monthly payments will increase.
For these reasons, we believe the fear of a new housing bubble are currently unfounded.

Mortgage Rates Projected to Increase

May 22, 2013
Mortgage Rates Projected to Increase
Posted: 22 May 2013 04:00 AM PDT
The Mortgage Bankers Association, Fannie Mae and the National Association of Realtors have all projected that the 30-year mortgage rate will be at least 4% by the end of 2013. If we assume that rates will still be at 4% in twelve months, here is the difference a buyer will pay if they wait.

House Prices Projected to Increase

May 21, 2013
House Prices Projected to Increase
Posted: 21 May 2013 04:00 AM PDT
Experts have projected that U.S. home prices will appreciate by 5.4% in 2013. If we assume that prices will rise about the same 5% over the next twelve months, here is the difference a buyer will pay if they wait a year.
Price Increase

State’s Economic Impact of a Home Sale [INFOGRAPHIC]

May 17, 2013
State’s Economic Impact of a Home Sale [INFOGRAPHIC]
Posted: 17 May 2013 04:00 AM PDT
Economic Impact
Recently the research team at the National Association of Realtors (NAR) looked at studies done by the Bureau of Economic Analysis, the Census Bureau, Macroeconomic Advisors and the Joint Center for Housing Studies at Harvard. After reviewing the data, they determined the total economic impact of a typical home sale in each state.

What Is Important to You?

May 15, 2013
What Is Important to You?
Posted: 15 May 2013 04:00 AM PDT
iStock_000007442166SmallEvery day we try to bring you a better understanding of what we believe to be the major issues impacting the current real estate market. Today, we want to hear the topics on which YOU BELIEVE we should be reporting. Please leave your suggestion in the comment section below (If you are receiving this by email, please do not reply to the email but instead go directly to the comment section on the blog post itself by clicking on the title of the post).
We will try our best to shine a brighter light on the areas you suggest. We are looking forward to hearing from you!

Will Millennials Drive House Sales in 2013?

May 7, 2013
Will Millennials Drive House Sales in 2013?

Will Millennials Drive House Sales in 2013?

Posted: 07 May 2013 04:00 AM PDT

MillenialsThe cover story of last month’s Barron’s Magazine discussed the Millennial generation and the impact they will have on the economy including the housing sector. There have been many contrasting views about this age group and their feelings on whether or not homeownership is a part of their personal American Dream.

Here are few questions about this generation that have been debated over the last several years… along with some current findings.

Is the Number of Millennials Large Enough to Make an Impact?

The Barron’s article quantifies their potential impact:

“Millennials sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 — make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7% larger than the baby-boom generation, which came of age in the 1970s and ’80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.”

Do Millennials Even Believe in Homeownership?

There have been many recent studies showing this generation’s belief in homeownership is as strong as previous generations. Just last month, Gallup released a poll, American Dream of Owning Home Lives On, Even for Young, which revealed that 91% of young adults between 18 and 29 years old either own a home or plan to buy one. The report says:

“Nearly 7 in 10 Americans aged 18 to 29 currently do not own a home, but plan on buying one… Coupling this with the 21% of younger Americans who say they already are homeowners leaves few adults under 30 who say they don’t own a home and have no plans on buying one.”

What about Student Debt?

Barron’s explains the challenge may not be as crippling as some think.

“There is almost $1 trillion of student debt outstanding in the U.S. today, which could limit the purchasing power of Millennials…But, total figures are misleading. The average student loan among Gen Y-ers is $25,000, and the median loan is nearly $14,000, according to the Federal Reserve Bank of Kansas City. Less than 1% of student loans are larger than $100,000.”

Are They Ready to Leave Mom & Dad’s?

The economy forced many young adults to return home after college to live with their parents. Barron’s explains that, as the economy improves, this anomaly will correct itself:

“As the millennials’ employment situation improves, more young adults living at home will pack their bags and move out. That could spur an increase in U.S. household formation, which turned negative in 2007-08. Since then, the number of newly created households has recovered to about a million a year, still well below an annual average of 1.5 million since the 1970s, according to Census Bureau data.”

According to the latest CoreLogic Market Pulse Report, this correction is already occurring. They explain:

“The recession curtailed household formations, causing doubling-up in living arrangements and driving young potential buyers back to their parents. More recent data shows a shift with household formations returning in force.”

Also, Freddie Mac recently projected new household formations to again return to the 1.5 million levels in 2013.

Will They Prefer Owning over Renting?

The Barron’s story gives a good reason why they might:

“Greater financial security could mean an increase in the birth rate, which typically slumps during economic downturns. Francese sees the average birth rate for U.S. women rising to 2.1-2.2 in coming years from a depressed 1.9 recently. ‘A lot of Millennials put off having babies, and now they will get to work,’ he says. That suggests they will also start buying homes.”

CoreLogic believes that the first time homebuyer is poised to return to the market this year. They explain:

“As new renter-households are formed, rental prices are bid up, making the prospect of owning more attractive to existing renters. Sustained low interest rates add to the appeal for current renters to convert to homeownership. The expectation this spring is that more renters will take advantage of historically low interest rates and low home prices to become homeowners.”

We agree.


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