Market Recovery

Random Ramblings
1

Hi,

As I watch markets around the country move back toward recovery I have concerns as to whether we are re-inflating the bubble and setting ourselves up for another future bursting of the bubble.

I will give you an example as I own a lot of property in Arizona the Phoenix area market (Maricopa County) has seen a roughly 20% increase of property values during 2012, however typically the average appreciation rate has been much lower.

US Census data shows an average US appreciation rate of 5.4% from 1963 through 2008.
National Association of Realtors shows an average appreciation rate of 5.4% from 1986 through 2009.
Case-Schiller shows an average appreciation rate of 3.4% from 1987 through 2009.

Now of course this is a nationwide statistic which includes all states, however we all know a stable and healthy appreciation rate is seen in some markets of between 4 and 9 percent per year.

When we push market recovery so fast and so quick that wages, local economy and job’s outlook does not keep up we risk imploding the whole market all over again.

I have real concerns and want to get your opinions as after all it is “us” investors which are pushing market values!
Somewhere I believe is a happy medium which can provide stability and integrity to a potential explosive market.

My big concern is it took 2007, 2008, 2009 and 2010 to destroy billions and billions of dollars in life savings and in my example of the Phoenix market we will be back to 2005 market values by 2016, which does nothing to understand and resolve the underlying market fundamentals which caused the problem in the first place.

Let me know your thoughts?

                          GR
2

You might have failed to recognize that 1963 to 2008 are many years and so the average is bound to be low compared with growth for just one year 2012 that you have compared with.
For example what was the growth in some of the good years between 1963 and 2008? Like 2004 by itself?

Stats can be manipulated to say anything if not properly analyzed.

3

Hi,

Your absolutely correct Moses however 2004 does not matter as we have already gone through a recession, however if we recover faster than job growth, faster than cost of living wage increases and faster than the local GDP we have problems!

So what happens to any market area (I used Phoenix Arizona strictly as an example) but whether you choose any town, city, county or state in the country and your property hyper appreciates then aren’t we back in the same situation we started in?

And I agree Moses statistics can be manipulated but I am using actual sales (Comps) increases from the Arizona MLS system which is strictly reflected as sales when I say “Phoenix real estate appreciated by 20% in 2012” which was my example, however I could choose anyplace in the US recovering so quickly it would be alarming.

But what I want to hear from my fellow investors and Moses you can pretend for this that there is “ZERO” (0) appreciation and theorize (Project - It does not have to be argued whether it’s factual or not) that there is a 12, 15, 18, 21 or 24 percent recovery from recession low prices in “One Year”! Anywhere in the US or the World!!!

And what I want to hear and understand is "Does a huge appreciation rate bother you as an investor? And if this continues would you be concerned about re-bursting the bubble?

At this rate a home in Phoenix worth $300k in 2005 and worth $120k in 2010 will be worth $750k in 20 years. But I can guarantee you the Phoenix area wage rate (Right to work state) did not go up 20% last year, the unemployment rate did not decrease by 20% of the job loss figure since 2006, and the local Phoenix area economy did not recover 20% of the recession GDP lost during 2006, 2007, 2008, 2009 and 2010.

Quite frankly I don’t have to worry as much as most of you because I don’t have my life savings in real estate, I am not mortgaged at 70, 75 or 80 percent on my properties and I don’t have to rely on market fundamentals to sustain value.

But I will tell you “I am not buying property in market’s which are re-inflating the bubble!”

                         GR
4

GR,

I am by no means an economist, or anyone who knows anything about much. But I can go with my gut feeling, and suggest that before you get too strung out on the upswing, you look more at the downside. Did prices fall below the bottom of the stats that you are looking at? Are the appreciation numbers and growth numbers you are looking at to bring it back up to the real market value?

I guess the real question is seeing as you are talking about one of the hardest hit markets, as am I (Vegas), was it a hyper-over correction that dumped prices well below build prices that is correcting to where the market should have been? And then plateau for the next three years? That’s the conversations we are having here now.

5

I think it could just be a case of the pendulum swung too far in one direction (on the low side) and now the market is correcting somewhat for that. What you mention about wages vs housing prices was exactly what I saw in my area of WA state back in 2005 when I got there. I lived in a small, mostly military town. Most of the houses that would be big enough for my family of six were close to 400k, but I realized that it was really only the high ranking people who could afford those prices (and there weren’t that many higher ranking people in that market). Luckily our family was in base housing when the market imploded.
In my market in MS, it’s been pretty flat for awhile. Houses are still well under bubble prices and not appreciating at any type of high rate.
I wouldn’t be overly concerned about a decent bump after a large drop like we saw a few years ago. It would be concerning if there was a large increase year after year for several years.

6

GR,

What percentage are now foreclosure vs conventional sales?
How do those ratios compare to the past few years?

I would expect that when you’ve closed out most of the foreclosures in the market the prices would jump because you now have decent homes instead of rehab projects. 20% doesn’t sound like an unreasonable margin of difference between the two different types of product.

I would be looking now at how the market appreciates going forward.

pete

7

GR,
I am in agreement with you. I believe that the market is still seeking equilibrium and is being propped up by policy motivated by the fear of deflation, ie. the Fed’s QE policies. At some point in the future as tax rates and interest rates increase, housing prices will drop even further, giving cash buyers another opportunity to buy at a discount.

JP

8

Pete got it right.

9

Hi,

This article was written by Tim Reid at Reuters!                  6/27/13

Some big cities at risk of another housing bubble: Shiller

By Tim Reid

(Reuters) - Dramatic home price gains in some of America’s largest cities point to a potentially new housing bubble in those areas, according to Robert Shiller, who helped create a closely watched gauge of U.S. housing prices.

Shiller said big price gains in Las Vegas, Los Angeles, San Francisco, Miami and Phoenix, fueled in part by a large influx of outside investor money, are a possible sign of trouble ahead.

“There is a risk of bubbles in these cities,” Shiller, a co-founder of the S&P/Case-Shiller Home Price Index, told Reuters on Wednesday. “House prices increases have been dramatic. It looks like the beginning of the last bubble.”

There is a risk that prices could rise for another year in these areas and then fall back, hurting newer buyers as they try and compete in markets where low inventory and all-cash Wall Street investors were pushing prices upwards.

The latest Standard & Poor’s Case-Shiller index report showed that prices of single-family homes in 20 U.S. metropolitan areas jumped 12.1 percent in April, marking the biggest annual gain in seven years. The gains were led by price increases of 24 percent in San Francisco, 22.3 percent in Las Vegas, 21.5 percent in Phoenix, 19 percent in Los Angeles and 13 percent in Miami.

The price gains were the latest sign that the U.S. housing market, a cornerstone of the American economy, may be in a sustainable recovery after the catastrophic property crash that triggered the 2008 financial crisis and subsequent deep recession.

Shiller said it is still too early to predict how healthy the housing recovery is, and he was unsure if prices overall would continue to rise after another year.

But a property crash was unlikely in the near term, he said, because lending rules have tightened and government oversight of the mortgage industry has been strengthened.

Average U.S. mortgage rates increased to their highest levels in two years this week, to 4.46 percent, according to Freddie Mac, the number two home lending company, a potential break on house price increases.

But Shiller said there were clear signs of buying behavior in some major cities that pointed to a housing market that was already overheating, despite the 2008 crash.

(Reporting by Tim Reid in Los Angeles; Editing by Leslie Adler)

And you guys thought I was crazy and crying wolf, nothing like experience!

                 GR
10

GR

Quite a few people from ND have been buying winter homes in the Phoenix and Mesa areas. I suspect that many of them are paying cash or have very small mortgages, which should help prevent a bubble bust. The heat that you are currently having is just as scary as our snow and sub zero weather.

My wife and I went down to Las Vegas last fall to look at some potential investment properties. People we know suggested that we look in the Anthem area. Several of the realtors we talked to suggested that the Anthem area did not crash to the extent of the rest of Las Vegas. They said that many of 55 and over communities owners paid cash and they were not as quick to bail as others so the prices did not fall as much. This is based on what several Realtors stated. I am not sure how this correlates to Phoenix.

randyscott

11

GR,

Please note in the article:

"The price gains were the latest sign that the U.S. housing market, a cornerstone of the American economy, may be in a sustainable recovery after the catastrophic property crash that triggered the 2008 financial crisis and subsequent deep recession.

Shiller said it is still too early to predict how healthy the housing recovery is, and he was unsure if prices overall would continue to rise after another year.

But a property crash was unlikely in the near term, he said, because lending rules have tightened and government oversight of the mortgage industry has been strengthened."

This sounds to me more like a recovery than another boom.

I stand by the idea that these big gains were normalization of the real estate pricing with normal retail properties becoming a larger majority of sales vs distressed properties of the past few years.

Do you think these increases are due to speculators jumping into the market hoping for appreciation?

I do believe with Hedge funds getting into the rental business we will see another bust when they don’t see the profits they are expecting and decide to exit the rental business. I expect his within a couple/three years. This should have a bit of a drag on markets that they are in but hopefully the real estate market will be recovered enough to deal with the influx of substandard houses hitting the market.
I look forward to picking up more cheap houses when they dump em.

Not crazy, but even the boy who cried wolf was right eventually…

pete