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Opinion, commentary, and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
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Head's up! There's a housing "bubble" forming in markets beyond San Francisco

Denver, Dallas, Seattle to name a few

July 9, 2015

Admittedly, the recent article published in HousingWire titled, “San Francisco exhibiting potential signs of a housing bubble,” focuses on one specific anomalous Left Coast housing market. But, this is clearly, in my view, a precursor to more markets, particularly in California, exhibiting the same signs. Housing bubbles will surely not be confined to the Golden State.

The article, which was written by HousingWire reporter Brenna Swanson, states that according to Collateral Analytics’ California Home Price Forecast Models, the San Francisco Bay area is showing, “… some warning signs of a bubble,” but goes on to quote that it is important to clarify that this is only happening in the San Francisco Bay Area, according to the report.

Michael Sklarz, president and CEO of Collateral Analytics, a provider of automated valuation solutions, is also quoted in the piece as saying, “When discussing price bubbles, we feel that there are few terms which are more widely used and less understood.” Perhaps, but if it walks like a duck and quacks like a duck, it is, quite possibly, a duck.

Furthermore, while Collateral Analytics explained that, “some economists and real estate observers are trying to sensationalize an issue that does not exist,” I submit that many real estate and mortgage-related organizations spin the facts to persuade consumers/homebuyers and homeowners that the housing sector is recovering across the country and getting even stronger – which it is not.

California and New York housing markets, particularly the San Francisco Bay Area and Manhattan are not representative of what is taking place in countless markets in between.

There are numerous real estate professionals I know, with whom I stay in contact throughout California and elsewhere, who disagree that the signs of a housing bubble are confined to the San Francisco Bay area.

Indeed, it has been widely reported that Denver, Dallas, Seattle and Salt Lake City are among other markets where home prices have outstripped income growth, which is a leading indicator of a bubble, or “echo-bubble” as this next one will be.

Without a vibrant economy, the housing market cannot truly recover. And the national economy is far from vibrant.

The continued abysmal job market plays a huge role in keeping the national housing market from recovering.

Although the “official” unemployment rate below 6% is widely touted as “proof” of a resurgent economy, the sad truth is that the 62.6% workforce participation rate, as reported by the Bureau of Labor Statistics, is lower than it has been in several decades, and near its lowest point since the end of World War II.

This artificially drives down the unemployment rate.

It can be argued that demographics related to Baby Boomers reaching retirement age is the cause, but that is only partially so.

In addition to massive numbers of Baby Boomers retiring each month, many of the jobs that have been “created” over the past seven years have been lower-paying and/or part-time jobs. Discretionary income for so many in this country today is nearly non-existent. With more than one thousand benefit and entitlement programs to choose from, millions of Americans have decided it isn’t worth looking for a job today.

Stagnant wages and lower paying jobs for millions of Americans do not translate into purchasing power – especially as it relates to housing.

And while demand for housing in certain markets has combined with shrinking inventories to drive housing prices up to pre-financial and housing crisis levels in some markets, without more potential homebuyers entering the housing market, because of stricter lending guidelines, rising interest rates and other factors, there begins to be a shrinking market of move-up buyers.

This eventually drives prices down from “bubble-induced” levels.

With another national election cycle upon us, it is expected that we will see an increase in media reports painting a rosy picture relative to the economy in general and the housing sector in particular.

No doubt more stories will point to “anomalies” such as the one in the San Francisco Bay Area.

But beyond the spin there will be growing signs that a housing bubble is once again forming across America. 

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