There is no housing buble (in most areas..). Surprising Volatiliy

4 Replies

Good news! Everything is OK!!!

Unfortunately, this analysis published yesterday by the SF Federal Reserve doesn't analyze commercial real estate, or "hot" markets vs cold markets (or the SF Bay, which is getting overheated). But the SF Fed put up a great graph I have never seen before.. Look how volatile real estate prices are in some states versus others. The largest house price boom states are CA, NV, FL, HI, AZ, and most small booms are Midwest.. Maybe things are a little wilder out West! lol (& FL). Does this impact your thoughts about appreciation versus cash flow? Turnkey Midwest versus coastal investing? Whether you can stomach the volatility out West..?

State-level house prices

I was curious that house price/rent was used in the graph below, rather than housing affordability - to me, that has a lot to do with the sustainability of the market. I reached out to the author, Reuven Glick of the San Francisco Federal Reserve about it, and he said the main point was that today's buyers are less leveraged and overstretched than the last boom in prices, without necessarily assessing the affordability to the masses.

While the author does not try to come to a conclusion about prices in the future (that RE prices should be less vulnerable in another downturn because their should be less distress, given the lower ratio of mortgage debt to income..?), this assessment was interesting.

Housing valuation and leverage ratios

Will the Fed's inability to slam down rates by 300bp again like they always do, offset the benefits of a softer RE downturn  due to less leverage in the next down cycle? Given that rents are increasing all over the country (and especially in the Bay), are people getting more stretched, even without the extra leverage? And isn't that masked by measuring house prices/rent, especially if price & rent increasing are equally outpacing incomes? Doesn't housing affordability (HAI) tell a story about the sustainability of the RE market (how many qualified buyers are out there en masse..?)

*My graph above: Back to 2004-2006 Affordability: Affordability in the core Bay Area has decreased sharply, is headed towards the lowest affordability during our last 2 booms (SF is already there), and the varying counties are increasingly converging in unaffordability, chasing SF (the first to hit record unaffordability, as usual..), as they have done in other cycles. That is NOT a healthy, sustainable market.

Admittedly, this time is different. It's different every time. But it still happens. Things go up. And things go down. A different reason every time, with similar threads. House price increases are not purely being fueled by increases in credit. But at least in the Bay Area, they are definitely being helped by the non-permanent forces (one might say a temporary, targeted stimulus) of a tech boom & historically boom-time unemployment (3.2% in SF), foreign buyers, low inventory (below a month in many areas), and the crazy low rates that have been sustained for so long (down 300bp from 2006), with few other places to put the money to get yield (yield & spread compression for Fed to push everyone into risk assets).

How long will all those things go on?

Thank you to @Kathryn M. for sharing this article :)

Thanks for sharing (and providing your thoughts). I always enjoy reads that integrate in the markets economics.

Nothing new here the Author says, "Things go up, things go down...a different reason every time."  It's been that way since Benjamin Franklin's day.  The key as with any investment modality is to rely on "time."  If you have exposure in any asset class with "ups and downs", then time is your equalizer and friend.  If you have enough time for your financial plan to achieve your desired results, then you will.  If not, then you won't.

Nice article @J. M., I think there is a bubble in the big markets next to me, but we will be finding out over the next year or two.  The bubble will be from folks leaving the area due to loss of work though.

Originally posted by @Jerry W. :

Nice article @J. M., I think there is a bubble in the big markets next to me, but we will be finding out over the next year or two.  The bubble will be from folks leaving the area due to loss of work though.

 Different reason, same story, as what will happen eventually in the Bay.
Non-permanent, localized real estate stimulus from a booming industry:
Yours: Oil/Energy/Resources (I assume)
Bay: Tech/Foreign Money

It can't go on forever.
And yours is already experiencing the decline in the real economy. We'll see how the RE plays out. Will be highly localized and depend on the market segment too..

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