Real Estate Market May Be Poised for a Small Bubble

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Considering the disparities in property value growth, as well as markedly accelerated rates of purchase throughout certain metros, there’s been ongoing speculation that the housing market may be teetering nearer to price instability. Much of the worry around the possibility of a second bubble seemed driven as much by fear of a repeated crash as much as by market technicals, but discussion about housing market hurdles have only persisted well into the third quarter of this year. As I noted in a prior post, this apprehension has only been bolstered by paroxysms of activity in markets that far outpaces the national market consensus.

According to recent analysis from Forbes contributor Sy Harding, there’s a respectable chance that maneuvering around a second housing bubble could be the American economy’s next great hurdle. Sy Harding noted that, in terms of consumer spending, automotive and housing purchases in particular are the heaviest engines of economic growth. The housing market rebounded with exceptional agility in 2012, and new housing starts were up 28.1% this May year-over-year. Throughout the same time period, home sales had risen 15.2% nationwide as well. This was, needless to say, no small solace for both long-beleaguered property investors as well as Americans struggling with toxic real estate holdings.

However, as the Forbes article is keen to point out, much of the momentum for the recovery has occurred from the machinations of institutional investors. Organic market demand tends to have a deeper impact in sustaining price stability, and tends to buoy any given market sector through persistent demand. In cases where hedge funds or singular investment entities are overwhelmingly involved with property purchases, it inevitably produces skyrocketing values at the expense of stabilizing factors. Additionally, home prices that rise too sharply tend to scare away first-time homebuyers, the overwhelming majority of which are much more conservative in their price guidelines.

So What Are the Consequences?

Ultimately, this sets the stage for a boom-to-plummet equation. Or, failing something as dramatic, inherent unevenness in both value growth and market demand. Even if a serious bubble is avoided, heavy market fluctuations could only further cause the housing market’s largest untapped demographic to shy away. The consumer confidence of first-time buyers may emerge as the strongest motivator for an enduring recovery, and keeping an entire demographic at an arm’s distance will only have self-reinforcing consequences.

As the Forbes article also notes, the widespread exploitation of depressed property values for the sake of flip-sell transactions has also resulted in more transient purchase trends. Enterprising investors who attempted to anticipate incoming demand bought neglected homes and refurbished them for later sale, but a substantive volume of these have remained unpurchased as demand has selectively tapered off. With the job market remaining lukewarm, potential first-time buyers have chosen to remain renters. Ultimately, the housing market would do well to veer away from recovering as a silo sector, for if job growth remains slow while real estate values jump, the stage will be set for a quick depression in purchase activity.

Photo: photographer padawan *(xava du)

About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.

7 Comments

  1. I’ve read similar predictions of a second bubble, but a big difference this go round is that the home loans that are currently in place should be more stable. With short sales and bankowned inventories down – combined with strict rules for current and future loans written – shouldn’t this help to prevent another housing bubble?

  2. something I worry about is seeing the # of recent IPO of Public companies whose business model is buying rentals and managing portfolios of rentals along with the # of hedge funds buying up single family homes.

  3. I think that those areas that went through the roof in the last few years, Arizona and California especially, are where I would watch to see what develops. They are now the sites of new Reality TV shows, and Realtors in parts of California now pocket listings to have any listings due to having only weeks of housing supply or days.

    But here is an eery thought, if the Fed and Government allowed for a fall last time, why not again? If the Fed raises interest rates, does the Government have the funds to pay the national debt, which will cost more to our debtors? It is catch-22. So I think, yeah, eery here, that the Government would allow another bubble failure, just to keep interest rates low.

    Jack

  4. Cheryl Carrier on

    I don’t see the Fed throwing cold water on a nascent housing recovery. Overall, we are well under peak prices, have lower rates and real underwriting. I’d like to know what percent of supply is institutionally owned. I’d also be interested in household formation and job creation in my area. I really don’t care what is going on in Phoenix. Should I?

  5. The strategies that have occurred in Phoenix with investors swooping in has happened pretty much the same in many of the other areas. So despite real estate being a localized animal, paying attention to what is happening in other markets could provide anecdotal evidence of what could soon be coming to other areas.

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