Chill Out in a Hot Home Market
There's a lot of jubilation out there because home prices are rising strongly just about everywhere, after six years of first steep decline and later lateral motion.
I guess I'm supposed to share in the joy because, as a homeowner, I stand to benefit. And as a financial observer, I know that folks with growing home equity are more likely to spend normally and boost the broader economy, creating more jobs. That's all good.
So why am I not overjoyed? Because in some markets, prices are rising too fast -- double-digit annual hikes, compared with barely 2% gains in personal income.
This trend is reversing the big improvement in home affordability of 2007 through 2012, which was a boon to first-time buyers who had the courage (and creditworthiness) to buy during the long slump. In some cities, the surge in home prices is bringing back the frantic "have to buy now" mentality that infected the market during the bubble years of 2003-06.
Why the price surge? Factors include the Federal Reserve's loose monetary policy, historically low mortgage rates and some modest relaxing of credit standards by lenders.
Investors rush in. And then there's Wall Street. Ironically, the same hot money that played a role (along with other forces) in inflating and bursting the last bubble now seems clueless -- or worse, callous -- about its role in creating a new one.
Last time, Wall Street flooded the world with easy money for shaky mortgages, then bundled those mortgages and sold them in tiny pieces to global investors, who later found them close to worthless. This time, new pools of capital are snapping up foreclosed homes in all-cash deals, with the intention of fixing them up, renting them for a few years and selling them for a profit. Some of these funds are also securitizing their portfolios, selling chunks to both institutions and small investors.
The early investment pools -- those that began buying at the bottom two or three years ago -- will do just fine. But the last ones in -- those paying higher prices now -- will likely disappoint their investors.
In the meantime, investors are making it hard for would-be homeowners to buy their first place. Stories abound of young couples putting in offers on as many as ten homes, raising their bids and losing each one to a higher offer from an all-cash buyer. Just four years ago, a lot of these same young adults, seeing the carnage in the home market, were telling pollsters that they never wanted to own a home.
I’m delighted they have changed their minds -- if it's for the right reason: They want a place of their own they can customize and enjoy for a number of years with the benefits of tax breaks and forced monthly savings, and perhaps modest appreciation, too. In short, they want a home, not a speculation.
In the fall of 2005, during the last housing boom, I wrote: "Residential real estate is severely overpriced in most large metro areas. Prices will likely flatten or decline as mortgage rates gradually rise, rents fall amid a surfeit of investor-owned houses and condos, and the affordability chasm widens between home prices and personal income."
I don't see another property crash in the offing. But the supply of homes is soaring, and the fat price hikes of the past year will likely flatten out to historical norms -- in line with income gains and just a point or so above the inflation rate.
My advice then -- and now -- for first-time home buyers in hot markets: Chill out and stick to a target price you can afford. Your day will come.
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