Housing bubble 2.0?

Question

I've been following Mark Hanson (Used to write as 'Mr. Mortgage') for a while and he's been pretty good at predicting the future in regards to real estate.

I do believe there's a bubble, especially here in Northern California

http://mhanson.com/archives/1546

Xing Zhu · Answer

In comparison to other major nations, US housing was the cheapest even during the bubble time. The reason it crashed was its extremely low loan quality (high leverage with low credit scores), non recourse loans  and strategic defaulting as the law has been in favor of it.

After the crash, the policy makers have successfully lowered the leverage. More importantly,  the effort has been made to shift more risk from the shoulders of end users to that of investors who paid cash and was not protected by non-recourse loans. It is also more difficult for investors to default strategically. Another purpose of these policies is to make the housing market less correlated  to employment situation as more owners are investors.

There is a lot money sitting there in the world. The US RE is a clear target for the money.

Mark Ferguson · Answer

I think there may be localized bubbles but a national bubble.  The median price in the US is $177,500, but builders can't build that cheap in most areas. In most areas we had no building for seven years, yet population kept rising. During the housing crisis everyone relied on REO for inventory, but that is virtually gone. Now there are not enough houses for the lower to middle markets and builders can't build cheap enough to meet that demand.  I don't see how prices can go down with the current market conditions in most areas. Some of the super high valued areas with massive hedge fund buying may have mini bubbles. The hedge funds would be dumb to drop all their inventory because it would destroy their own market.

Robert Taylor · Answer

I'm in agreement with @Mark  Ferguson on this, I can certainly see some local bubbles happening, but we've always had local bubbles, often in the same places like SoCal, parts of Florida, etc. We've been through a HUGE correction in prices, even here in Milwaukee, an area that rarely has ever seen prices decline to any large extent, prices have corrected quite a bit from 2008 or so. The new construction market has been nearly dead for several years now, the only people building new were the ones who REALLY wanted to and apparently had money to burn or didn't mind paying a premium for building exactly what they wanted.

Also @Xing Zhu makes an excellent point about foreign money coming into the US market. Remember that even though we've been beaten up a bit lately with all of the talk about being passed up by China sooner or later and whatever other anti-US sentiment there is out there, the USA is still BY FAR the #1 place that people around the world would like to be and is also considered the safest place to invest in things. One big thing for wealthy foreigners to invest in here is real estate. In fact besides being a factor that I think would help save us from a total real estate crash, its also probably a factor in influencing some of these local bubbles. From what I've heard, a lot of the purchases that have revived the Miami market for one, one which was nearly wiped out a few years ago with whole skyscrapers full of condos sitting empty or even unfinished, a lot of that money is coming from overseas. Countries like Brazil, which has been booming lately and making lots of new multi-millionaires and even billionaires, where do you think those people want to not only safely invest and park some of their new-found wealth but also get a second home with that money? Heck yeah, its here in the USA!

Tim G. · Answer

Someones been listening to Mr. Norris. I also agree with what you said as I've listened to him too.

Xing Zhu · Answer

No, we are very far from a bubble state. US household debt will drop further as a result of Dodd-Frank. It just that the best time to enter the market has gone.

Tuna Hirun · Answer

Housing bubble is a hard phrase to use as everyone has slightly different meanings to the term.

Random thoughts: We don't really have the threat of Shadow Inventory as that is solving itself due to the increase in prices.  Housing interest rates is the lowest we ever have that's recorded.  So even if interest rates hike up, it may not hurt us for awhile.  In 2005, interest rates on average was around 6%.  We still have ways to move up.  Amazingly, we love buying when prices are going up and selling when prices are dropping.  A good way to look at that is the affordability chart.  As affordability increases like back in 2009-2012, the general crowd was selling.  But as affordability decreases, the opposite tends to happen.

So I'm not sure if we are in a bubble as lending has been the safest it's been in a very long time.  I highly doubt that lending restrictions would loosen up to 2006.  Market cycles happens and it's part of all asset classes.

Last thought:  It's probably a very good time for a lot of investors on this forum with the market shifting cycle as well.  Great investors can profit on all market cycles, and there's a lot of great investors on this site!

Scott W. · Answer

Yep, no jobs = no "true" appreciation. unemployment rates look better, however, doesn't account those that have left the market or those underemployed ("would you like fries with that?").

hedge funds are already getting out of the left coast...and who wouldn't after a 44% return in one year.

what the REIT's are doing in my area are really scary. One bought 50 homes in one suburb in the last 10 months. These are newer, bigger homes that they rent out. What landlord cash flows big homes for $1650 in rent? It doesn't happen.

It's all about speculation and there was a front page article about this going on in my local paper. The thing is, it talked about how "we're in the rental business long term."

Yeah right.

Duncan Taylor · Answer

There are undoubtedly some localized bubbles that will work themselves out. But, there is no large scale bubble at a macro level.

However, the correction is not over. Numerous policies have interfered with the correction started in 2008. The market will revert to its historical mean. In most areas that is probably going to happen with flat or very low appreciation for an extended period of time. But, in some markets, it will be more volatile, you will see spikes up and down.

I don't plan to buy in the US until at least late 2015 unless there are some dramatic changes.

As for the foreign money flowing in, that has already happened and will continue. But, that has less to do with what is happening with prices of real estate and much more to do with the weakening of the US dollar on the world stage. To foreign money, US housing is extremely cheap.

Chuck W. · Answer

I don't think the fundamentals are really in place. Employment numbers are getting better, but really are they? How many people have stopped looking for a job ? What quality of jobs are being created ? Aren't current interest rates artificially low ?

The latest news is the QE3 is going to slow down but the FEDS are going to keep interest rates low even if unemployment drops below 6.5%. It appears to be the usual manipulation by the FEDS.

Good luck trying to figure out the real estate market.

Justin B. · Answer

I agree and think its unsustainable, here is a thread I created today to talk about the surplus REO rentals https://www.biggerpockets.com/forums/16/topics/109878

Housing bubble 2.0?

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