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The Great Home Price Bubble

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In the past year the average sales price of a home in the US increased 16%. In places like Boise and Austin, it was more than 30%.

This is astonishing, especially during what we still must consider a recession. Normally, home prices rise no more than 5% a year. The last time prices rose this fast was in the late 1970s, when general inflation was raging. Even during the 2005 bubble, the average price never rose more than 12%.

Higher home prices aren’t necessarily a bad thing: They spur new construction, provide business for realtors and mortgage companies, create construction loans and home equity loans for banks, and increase the wealth of homeowners , who in turn produce more spending that benefits the economy.

The problem with rising home prices comes when they rise too fast, when they reach levels that are out of synch with economic reality, after which they crash back to their original value or even lower. After the 2005 bubble, average home prices began a four year slide that left them 20% lower, bankrupting homeowners, home builders and bankers in the process.

How do we know that home prices are rising too fast? After all, there are good reasons why tech companies move to Boise, why people like the life-style of Austin, why Florida beckons folks from the north. The population of both Boise and Austin grew 3% last year; of course home prices there will rise.

But explain to me why home prices also increased 18% in Flint, Michigan, where the level of jobs is still 6% lower than before the pandemic, where unemployment remains high at 7%, and where the population has shrunk every year for the past decade.

And why did home prices rise at least 10% in almost all of the 300 largest markets in the country?

Something else is going on here and the problem is that many people are on the verge of making bad decisions based on the premise that the recent rise in home prices will both continue and be sustained. In fact, there is now a disconnect between the sales price of homes and their actual value.

It’s not hard to see how this could happen. In a typical market only one out of every 200 homes is sold every month. If a well-off city dweller is willing to over-pay during the pandemic to buy a home in the country, it looks as if all 200 homes are now worth more. But are they really?

Once a home price bubble starts, it’s momentum keeps it going even when the eventual outcome is clear. I expect that this bubble will continue another year, so if you’re flipping homes you might be in luck. But if you’re thinking of spending some of the increased value of your home, or you’re a banker making home equity loans, or an investor buying rental properties, you should consider carefully where home prices may come down again and by how much.

Investors are in the toughest spot because they need to immediately get a good return on whatever price they pay for a property. The easiest way to do this is to invest only in apartments, and especially those with an established income stream. The price of these properties should NOT increase with home prices; rents are limited by incomes. If a seller suggests you just raise the rents, or if that’s your own idea, be sure you know the rent profile of the local market: how many people pay how much rent right now. I’ll say more about this below.

In the long run, the value of homes is determined by income, even though short-term changes in demand can run into a limited supply of homes, driving prices up. One way to see whether the surge of prices in a market is justified is to compare price increases with increases in income.

The table shows for 24 markets how much home prices increased in the last three years, the increase in income and the ratio of the two. In those markets where the ratio is close to or over 2.0 I’m pretty sure there will eventually be a crash in prices.

The higher the ratio in a market, the more precautions investors must take to ensure they will be able to fill a property at the necessary rent, especially if that requires raising rents. That means knowing the rent profile of the local area, and in particular the rent range with the highest concentration of renters. If the rents you need are much above this “best” rent range, you will have serious difficulty finding renters, either now or in two years when the average renter moves on.

A home price bubble is an annoyance for homeowners who buy at the peak of the market, but unimportant if they continue to live there. It’s a worry for lenders, but they’ll only suffer losses if there are wholesale foreclosures. Investors, however, can be saddled with a poorly performing property for years if they pay more than the rents can return. They’re the ones who must analyze bubble markets with the greatest care.



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One of Portland's largest construction companies moving out of city core

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The firm is trading the Pearl District for Beaverton.



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New Survey Finds Inflation, Housing Costs And Eviction Threats Hitting Minorities Hardest

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Minority communities have been the hardest hit financially by the current spike in consumer prices and housing costs, with high percentages of Black, Latino and Native American families reporting serious financial problems and even threats of eviction, according to a survey published Monday by the Harvard T. H. Chan School of Public Health, NPR and the Robert Wood Johnson Foundation.

With the annual increase in consumer prices hitting a 40-year high of 9.1% in June, Americans, by a wide margin, cite inflation as the number one problem facing the U.S. But the actual impact on individual households is more dispersed. For example, in the new survey, 58% of Black adults, 56% of Latinos and 69% of Native Americans say inflation has caused them serious financial problems, compared to 44% of white and 36% of Asian adults

Soaring rents are similarly hitting certain minority households the hardest. In the new survey, 16% of Black renters, 10% of Latino renters and 21% of Native American renters reported they had been evicted or threatened with eviction in the past year. That compares to 9% of white and 4% of Asian families. “This is just a warning from this survey, that unless the government can provide some help for vulnerable populations, a year from now they are going to have more people who are homeless,” said Robert J. Blendon, co-director of the survey and an emeritus professor of Health Policy and political analysis at the Harvard T.H. Chan School of Public Health

Programs of emergency rental aid helped around 5 million American families during the early months of the pandemic, with 1.5 million fewer evictions compared to pre-pandemic levels. After 22 million Americans lost their jobs during the start of the pandemic, Congress provided $25 billion in emergency rental assistance in the Coronavirus Aid, Relief, and Economic Security Act (CAR
AR
ES Act) passed in March 2020. A year later, in the American Rescue Plan, it added another $21.55 billion of rental assistance.

The CARES Act also included a temporary federal eviction moratorium that expired in the summer of 2020. It was later extended by the Centers for Disease Control (CDC), and then by Congress, and then again by the CDC. Finally, on August 3, 2021, after a surge in Covid-19 cases due to the Delta variant, the CDC extended the moratorium yet again. Later that month, the Supreme Court ruled against it.

Meanwhile, the emergency rental funds Congress appropriated have either been used up or are being returned to the federal government unspent. For example, last Thursday, Mississippi Governor Tate Reeves announced his state would halt the federally-funded Rental Assistance for Mississippians Program by Aug. 15, meaning as much as $130 million for the program would be returned to the federal government. California, having used up its federal money, ended its Covid-19 rental assistance program on March 31, 2022. It sent more than $4 billion to 344,000 households –but around 5,400 tenants and landlords have received emails asking to return money received in Covid-19 rent relief.

The housing component of the CPI increased 5.6% in the 12 months ended in June, but that includes costs to both homeowners and renters. In many places renters have seen far greater increases. According to housing data collected by Redfin
RDFN
, average asking rents in June were up 14% compared to June 2021. In some sunbelt cities like Miami, rent has increased nearly 40%.

The recent spike in rent prices leaves low-income and minority groups in particularly precarious situations. A May report by the Federal Reserve Board showed that as of last fall, about half of renters with income between $25,000 and $49,999 were already “cost burdened”—meaning they were spending more than 30% of their income on rent. In the Fed survey, 44% of Black households and 37% of Hispanic households reported they were renters, compared with just 21% of white households.

“Unless some sort of emergency help is provided, a substantial number of minority populations are going to be evicted over the next year,” Blendon warns.

MORE FROM FORBESMortgage Applications Rise In Potential Housing Market Respite-Could Home Buying Become More Affordable Soon?



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VanTrust Real Estate breaks ground on 1-million-square-foot building in Louisville

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The Kansas City-based developer continues to build large industrial buildings and parks nationwide.



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