Are We in a Real Estate Bubble?
It looks as if the U.S. could be in the midst of yet another real estate or housing bubble. Predictably, the media is playing cheerleader and singing the real estate industry’s song that we are in a “housing recovery.” Yet the real story seems to be that real estate is overpriced, the market is over-heated, and it is probably headed for a fall.
The National Association of Realtors reported that existing home sales rose by 2.4% to 5.17 million units nationwide. Gains in some cities were higher, with Denver reporting home price increases of 9% for the past year. That, of course, points to a classic bubble, at least in Denver.
Denver has actually reported price increases of 6.7% or higher every month since September 2012. Home prices in that market have begun to slow, but the average home listing price in Denver is $349,000, while the average sale price is $270,635, according to Zillow. Nor is Denver the only city where the market is overvalued; the average home listing price in Los Angeles County is $499,990, while the average sale price is $481,050.
These prices are totally unrealistic when compared to median income figures; the average per capita or individual income in Los Angeles County was $27,954, and the average household income was $56,266 in 2011. The average household income in the Denver area was $62,760, according to the Department of Numbers website.
Basically, the average person or family in Denver or Los Angeles can no longer afford to buy a home. The American dream of home ownership seems out of reach for them.
Here’s what’s truly bothersome: the average median home value in the United States is $176,500, according to Zillow. The average median listing price is $214,950, and the average sale price is $211,325. Those prices seem realistic and do not point to a bubble. Since the average U.S. household income is $52,250 and rising steadily, home ownership is well within reach of the average American in the average town.
Instead of a nationwide real estate bubble like we had in the last decade, we’re seeing regional bubbles. What we’re seeing is a few overheated pockets of high prices driven by speculation. These, of course, can collapse suddenly and damage the national economy.
We’re not seeing a national real estate bubble but a wave of dangerous speculation that’s sure to collapse. This real estate price bubble is sure to collapse because average Americans are not sharing in it.
It is not as dangerous as the great bubble ten years ago, because only a portion of the American public is participating in it. The bubble of the 2000s was so bad because almost every community and every segment of society participated in it.
The Rent Bubble
There is, of course, a dangerous trend in American housing and one that is not being discussed: the rent bubble. The average rent in America is now $1,500, according to Zillow. That puts renting beyond the reach of many Americans; around 32% of U.S. adults were living with roommates or family in 2012, a sure sign of a housing shortage.
What’s truly frightening is that not all of those people are poor; the median income of an adult sharing housing with somebody else was $29,000 in 2012, Zillow reported. In Denver it was $30,000. People with good jobs are having a hard time finding a place to live. That situation exists because nobody has been building working class housing, such as apartments, mobile homes, townhomes, duplexes, row houses, or small houses in the U.S. for decades.
So what’s going on here? The answer is that we no longer have a free market in housing in the United States. The housing market in the United States rewards builders of single family homes that are financed by low interest mortgages, not builders of apartments, mobile homes, or condos that are financed by rent.
Part of the problem is the Federal Reserve, which manipulates mortgage interest rates to force inflation into particular areas of the economy. This keeps consumer prices low and helps us avoid the kind of double-digit inflation we saw in the 1970s. It also encourages home building in an effort to promote “full employment.”
It creates a terrible dilemma in which housing prices are rising as incomes are falling. The U.S. median household income fell by 2.28% in the last three years.
Basically, average Americans are not sharing in the housing price bubble. What’s worse is that the increase in housing prices could eat up any additional income people have.
The Coming Real Estate Crash
So what does the future hold? Well, I see two things happening. First, both housing prices and real estate are going to come crashing down to earth. Instead of housing prices nationwide rising to match those in Denver and Los Angeles, housing prices in places like Denver and LA will fall to match the levels seen nationwide. That, of course, is likely to knock down housing prices in other areas.
Second, we’re going to see calls to change the Federal Reserve’s policy. Prominent Republicans are already attacking it and demanding changes. The chairman of the House’s Financial Services Committee, Congressman Jeb Hansarling (R-Texas), has proposed legislation that would restrict the Fed’s ability to set interest rates. Such a move would end cheap mortgage interest and cause a housing price collapse. That would lead to a collapse of the housing market.
Such a collapse would restore the free market in housing. Property owners and landlords would be forced to set realistic prices, and builders could start creating housing people might actually afford. It would also create a lot of pain because a lot of paper wealth (home value) would disappear and a lot of construction workers, builders, and realtors would be thrown out of work.
The bottom line is that the housing marketing is extremely unstable, and it is about to get far more unstable. Real estate is an investment to stay away from these days unless it is cheap.