Double Bubble? January 2013 Indicators
No one wants a Double Bubble in real estate except perhaps investors who leverage it by “flipping.” On the other hand, if there is one, as long as you know about it and can respond accordingly (i.e. if you’re buying, be cautious not to buy in at an inflated price), you’ll do fine. So once again the moral is, be informed. The information available in when it comes to investing in a home – housing indicators - is amongst the best available for any type of investment, it’s just that during the bubble folks ignored that information. So here it is again just in case anyone is worried about a “Double Bubble.”
While December U.S. home sales were down according to NAR, as can be expected during the holidays, sales were are up 0.4% in January to 4.92 million. Talking big picture, usually the wiser conversation, home sales are up 9.1% year over year, good, but still among the smallest year over year increase. In the South, for example, sales are up 1.0% MOM (14% YOY) and prices are up 13.4% YOY.
January U.S. home prices, on the other hand, were down month over month, though still up 12.3% year over year. Big picture, home prices have been down 5 out of the past 6 months and are at a low since last March. Even bigger picture, prices are still down 24.6% since the July 2006 bubble peak.
RealtyTrac, which measures foreclosure rates at the time of filing, sale date and REO, is telling us that 1 in every 869 US homes is in some stage of foreclosure. That’s 150,864 homes in the month of January, down month over month and down a whopping 28% year over year. But in many areas this decrease reflects the impact of investigations, settlements and new legislation addressing dual tracking, single point of contact and fines, not whether or not homeowners are paying their mortgages.
- U.S. foreclosure starts are down 11% month over month and 28% year over year. The decrease is largely credit to California where starts are down 62% month over month and 75% year over year. Some of the biggest year over year starts increases are in non-judicial states where rulings have stalled for the last year or so including Arkansas up 539% and Washington up 179%.
- REOs are down 5% month over month and 24% year over year. Auctions are up month over month in 28 states, highest in judicial states including Florida, but actually down year over year in Florida.
- Florida now tops the list for the most foreclosures filings both in January and for the most increases, 11 out of the past 13 months – clearly a proven upward trend by any definition. Florida foreclosure filings are now at the highest level for 5 months in a row with 1 in every 300 and 29,800 – twice the national average – last month alone. That’s a 12% month over month increase and 20% increase year over year, now beating even California. Ocala Florida ranks highest with 1 in every 233 homes in some stage of foreclosure. Other top US metros in Florida include Miami at #2 with 1 in every 228, Orlando ranked #3 with 1 in 241, Jacksonville # 4 at 1 in 301, Tampa #9 with 1 in 307 and Lakeland #10 thanks to 1 in 332.
- Lots of folks are still underwater, a wild card no one can be sure how will play out.
U.S. housing inventory, which has now fallen for 5 months in a row, is down 4.9% to 1.74 million units, or a 4.2 month supply. That’s the lowest level since December 1999 and 25.3% less than a year ago.
So is this or isn’t it a “Double Bubble?”
- The home prices we’re seeing today are not based on the same foundation as historical home prices. There’s no question that prices have seen big jumps in past few months. Remember normal prices increases are in the range of 3 to 6% a year. So why are today’s home prices rising so much quicker? Part of the answer of course is that they fell so quickly when the bubble burst and are recovering. The question really is, what is the top, where should those prices be now? Are there factors causing them to go higher than they should which are unsustainable. For example, we know that some of the biggest price increases are in speculative markets like Phoenix where prices dropped the most and are now up 26%, but still down 50% from peak year over year, or Las Vegas where prices have jumped up 15% year over year. In some of these prime locations that may fly. For example, foreign vacation home buyer are flocking to downtown Miami and Miami Beach properties, where prices are up almost 20% year over year. But these are high end buyers and properties and are likely sustainable. But we know that a lot of these buyers are also investors, actually about 19%, who are buying these units to rent out and basing the price they will pay on the rental income they expect to get, often outbidding each other and bidding prices up above asking, and the fact that they have to deploy funds. Rental rates are, of course also artificially driving home prices up. Over 2 million of the households displaced by foreclosure are now renting. And all sorts of investors from local mom and pops to big city hedge funds are investing in a new breed of, largely yet unproven, rental income properties now called “scattered residential rentals.” Operating costs for this type of asset can be much higher than traditional multi-family. If income projection don’t hold up, many of these units may wind up being flipped or worse yet, re-foreclosed. And of course, without an increase in wages, rental rates can’t go up forever. Already folks on the lower earning end are paying as much as 50% of their income for rent (a sustainable rule of thumb is 30 to 35%). The good news is higher rents may force some to buy instead which supports housing. A good rule of thumb is that, all other things being equal, when you can buy a home for less than 15 times your annual rent, you’re better off buying.
- For home price increase to be sustainable, at least historically, the increases need to derive from real owner occupants who can afford what they’re buying. Today home prices have been rising without a correlated rise in wages, meaning folks are not earning more but they are paying more for housing – a trend that cannot continue forever and often times does not end well. Healthy home prices organically increase with wages, income and employment and the rest of the economy. Average income we know is 10% less than it was a decade ago. $20 per hour jobs lost were replaced with $10 an hour jobs.
- Supply and demand is also factoring in to today’s home prices. Inventory is at its lowest level since 1999, down 4.9% to 1.74 million or a 4.2 month supply. That’s down 25.3% year over year and had fallen for 5 straight months. The reasons? Sellers holding off on selling, banks and servicers being forced to do more work outs, foreclosure delays due to backlogs, investigations and new rules, and of course investors buying up what there is. The result, temporarily higher prices. Once the backlog of foreclosures, by some counts as many as 2 million “zombie foreclosures” free up, the supply and demand matrix will shift.
We’re still seeing above average levels ofdistressed inventory of about23% (though down from was 24% in December and 35% in January 2012). 14% of that is foreclosures which sell for 20% less (a bigger discount that the previous17%, perhaps due to homes being in worse condition than before due to spending a longer time in the foreclosure process).The other9% of distressed is short sales which sell for 12% less (down from16%, perhaps due to more folks bidding for short sales due to less inventory and the overall knowledge that those deals happen faster than they did a few years back).Notably, even with all the rules requiring banks to consider foreclosure alternatives, we still have more foreclosures than short sales.
- Low interest rates are also fueling home price jumps. Moving forward new buyer occupants will face headwinds from tighter loan requirements including QRM under Dodd Frank, unemployment, law wages, student loan debt, and rising interest rates.
The bottom line, it sure looks like prices are increasing in non-organic ways. At the same time, home price have not yet returned to anything close to where they were at the peak of the bubble. So in that regard, even if we are seeing a “Double Bubble,” it’s nowhere near as severe as the last one.