Fitch Ratings looked into its real estate crystal ball and has declared that 2014 is going to be a year of slow growth.
Fitch, a credit rating agency, recently acknowledged a home price bubble has been forming in certain metro regions, particularly in the California Bay Area. Back in November they identified the source of the burgeoning bubble: cash sales and insatiable investors. From their most recent report:
“Prices look increasingly overvalued in California when compared with fundamental demand drivers. For example, San Francisco price-to-rent and price-to-income ratios have increased by nearly 25% since the beginning of 2012, and are approaching all-time highs.”
Unsustainable home price appreciation occurred in all of California’s metro regions over 2013. Nevertheless, Fitch insists a “sharp drop in prices is unlikely.” This is due to several factors, according to the report. Thanks to a generally improving economy, buyers are expected to return to the market. And Fitch suggests asset price inflation has boosted negative equity homeowners into positive equity territory. Continued turnover and healthy market momentum are imminent.
Hmm. Did Fitch miss the December 2013 home sales report? California had the lowest existing home sales since 2007. That’s right. Reports of positive equity abound. Yet the turnover that is supposed to occur as equity finds equilibrium just ain’t happening.
The simple reason is the newfound equity is artificial. Real end user demand has yet to return to the market. Some price appreciation has come from good old core inflation adding up over the past six years. Some is due to better jobs numbers. And that’s why Fitch is at least partially correct: a “sharp drop” will likely not occur. But continued price appreciation? We think a modest decline is more apparent.
Fitch is definitely erring on the side of optimism with this one. How foolish the optimism is, only time will tell.