We’re old hands at following the housing market. While the rest of the media proclaimed a “robust recovery” in California real estate, we’ve looked past the hype and called a spade a spade. Or, in this case, an unsustainable mini-bubble.
The mainstream is finally catching up with us. Fitch ratings just released a report stating several U.S. cities are nearing bubble-year home price peaks. Fitch considers incomes, rents and mortgage rates to determine the sustainability of home prices. Based on these metrics, Fitch estimates homes are overvalued by 17% nationwide.
Most of the cities experiencing housing price peaks are in California. San Francisco prices, for instance, have increased 20% year-over-year. San Francisco and San Jose are on track to set home price records in the next six months — Oakland, San Diego and Los Angeles are not far behind.
And where has all this asset price inflation come from? According to Fitch:
[R]ecent home price gains appear to be the product of rising investment sales and practices such as ‘flipping’ (buying and selling a home within a short time). All-cash sales have risen dramatically since last year and are now at nearly 50%. Cash sales are often indicative of investor behavior so the concern is that home price increases are being driven more through speculative buying than from increasing demand. . .
What’s worse is that prices continue to rise along with interest rates. The coincidence of rising prices and rising rates is an anomaly that will not last for long. It’s only occurred recently due to the proportion of cash deals to total sales volume.
As prices inevitably decline in these inflated California markets it’s important to keep in mind that the drop marks a return to sustainability. The consequences of the coming price disinflation will not be widely felt. Speculators will bear the brunt of the correction – which is only fair, considering how fervently they leveraged their cash offers to outbid middle-class end users. Well, speculators, what can we say? We tried to warn you.
So, while prices will fall, this is good news for a market that needs more real demand from end-users.