Americans are still spooked by the specter of another real estate bubble. This can easily be discerned by a simple Google news search for the words real estate bubble or housing bubble. Any such search will churn up dozens of headlines warning readers that the bubble is underway or the burst imminent.
Samples of such hysterics I located on September 6, 2015, included:
- The Wall Street Journal: “Surge in Commercial Real-Estate Prices Stirs Bubble Worries: Soaring demand for commercial property has drawn comparisons to delirious boom of the mid-2000s.”
- The Los Angeles Times: “Is L.A. in another real estate bubble?”
- Denver Real Estate Watch: “Foreclosure fear fades, but does Denver face a bubble?”
- Culture Cheat Sheet: Housing Bubble? Home Prices Hit New Record Highs in 15 States”
- Business Insider: “Experts are worried about another housing crash in Miami”
- The Washington Post by way of The Bradenton Herald: “Florida housing expert fears another bubble is about to burst.”
Naturally, many people are wondering, are these headlines accurate? Are we really in the midst of another real estate bubble like that in the early 2000s or not? The answer is no for a number of reasons.
Here are a few reasons why the United States is not facing a national real estate bubble:
- The present real estate bubble is only confined to certain geographic areas such as Los Angeles, Denver, the San Francisco Bay Area, San Jose, New York, and Miami–Fort Lauderdale. In Colorado, outside of Denver, real estate prices are soft; in some parts of my home state, such as Canon City, they are actually falling, according to our friends at Zillow. The Great Bubble of the Bush years was so destructive because it occurred in almost every town in America. The present bubble is confined to certain areas and segments of the market.
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- As I pointed out in June, housing prices have not returned to boom levels yet. The highest average U.S. price during the boom years was $230,400 in June 2006. Average prices reached a number close to that in June 2015, but the figure was not adjusted for inflation. When I ran the 2006 price through the U.S. Bureau of Labor Statistics’ Inflation Calculator, $230,400 in 2006 came to $271,777.14 dollars, meaning that prices are nowhere close.
- The market and the average home buyer are simply not in a buying mood. The demand for new housing in the United States is still 25% less than it was in 2005, and the level of new housing construction is 50% lower than it was in 2005. A real estate boom is characterized by a buying frenzy that triggers a sales frenzy leading to an oversupply that causes the bust. That is not happening here.
- The highest level of activity right now appears to be in commercial real estate. The value of U.S. commercial real estate transactions increased by 36% in the first half of 2015, The Wall Street Journal It should be noted here that this boom could be partially fueled real estate deals that ailing retailers such as Sears Holdings (NASDAQ: SEARS) are making in an attempt to raise cash. Sears sold 235 of its stores to a real estate investment trust called Seritage Growth Properties (NYSE: SRG) in July. Sears has also sold off real estate to mall owners. Sears’ CEO Eddie Lampert is making these deals in an attempt to keep the ailing retailer out of bankruptcy.
- The high real estate prices could be the result of low interest rates, which fuel cheap financing for those that can get mortgages rather than actual market demand. Wellington Denham, the boss of mortgage real estate investment trust (MREIT) Annaly Capital (NYSE: NLY), believes the high prices are the result of the U.S. Federal Reserve’s Quantitative Easing, which is trying to prop up the real estate and stock demands with artificially low interest rates and not a housing market revival.
- A true real estate bubble requires the easy availability of cheap financing, usually low-interest mortgages. Interest rates are low, but mortgages are only available to those that can meet rigid qualifications or those with money. Only a few banks such as Bank of Internet (NASDAQ: BOFI) have adopted loose lending standards. Credit is still hard to get, which confines the bubble to professional speculators or the wealthy and precludes participation by the average person. In a true real estate bubble, everybody from the hedge manager to the janitor participates and gets burned. Some news stories show that desperate brokers and lenders are actually underwriting mortgages for con artists because of lack of business.
So no, America, we are not in Great Real Estate Bubble Round II; instead, we are in a completely unstable real estate market. My prediction is that housing prices are headed for a major collapse within the next year followed by decades of stagnation. America’s real estate market will end up like Japan’s: plagued by overpriced zombie assets, expensive properties that nobody can afford to buy.
This situation will occur because there simply is no demand for all the overpriced housing in the market. Since nobody can afford these houses because of income inequality, our nation is going to be filled with empty houses that cannot be sold for years to come.