When will home prices fall?
- Not until the next economic recession. (54%, 98 Votes)
- By the end of 2014. (25%, 46 Votes)
- By the end of 2013. (20%, 37 Votes)
Total Voters: 181
As home prices continue to rise across the nation, many have become exuberant about the future of the housing market. Are these expectations for home prices irrational?
In support of those who believe the present home price inflation is sustainable, CoreLogic says today’s housing market is not in a bubble. CoreLogic (and others) assert that today’s home prices are fully rational, primarily since housing affordability is higher today than at any other time in recent history.
Of note, the affordability analysis is based on CoreLogic’s affordability index, which was last updated in March 2013, before June’s rate spike.
first tuesday insight
Two things to consider:
- CoreLogic is, by their own admission, touting a very optimistic view of the current situation.
- Further, their analysis is of the nation’s housing market, and we all know that California home sales are a different beast entirely.
This optimistic supposition is in part true — we agree that the current price inflation will not lead to a bubble the size of the recent Millennium Boom. But today’s market is a mini-bubble. Any expectation that prices will continue their same upward trajectory beyond the end of 2013 are ill-founded.
Why does first tuesday forecast home prices dropping by Q4 2013 and likely continuing during 2014? Three reasons:
1. Home sales volume has been tapering off since Q4 2012, and as of June 2013, is below one year earlier.
Historically, movement in home prices occur 12 months after home sales volume moves. Today’s price wave will hold slightly better than the 2009 stimulus price cycle. The only difference is that today’s movement is driven by a different short-term sales volume engine – speculation.
Speculation pushed back end users rather than pulling them forward as homebuyers. The common thread between now and the 2009 stimulus price cycle is a lack of qualified end users of homes.
2. first tuesday’s buyer purchasing power index (BPPI) is negative as of June 2013. This means homebuyers in California are able to qualify for less purchase-assist financing today than one year earlier – or at any time during the past two years. This places considerable downward pressure on prices unless mortgage rates drop below 3.75% soon.
Remember, buyer purchasing power is a much more useful forward-price measuring tool than CoreLogic’s affordability index. “Affordability” compares national median income with utterly meaningless median home prices. Convenient for primitive binary thinking, but serving no substantive purpose.
This type of market analysis leaves the cash buyer, cost of financing for cash-to-new-loan buyers and GRMs/capitalization rates out of the homeownership equation entirely.
Further, consider that everyone with a job qualifies to buy a home. Thus, the seller must adjust prices to homebuyer incomes if they intend to sell (i.e., make the property affordable).
The net result of CoreLogic’s affordability index is mathematical alchemy based on past events, little more than a look in the rear-view window, all the while missing the elephant dead ahead in the road.
3. Speculators are due to exit the housing market as soon as home prices cease their upward leap (as they soon will).
Once speculators (who currently comprise upwards of 50% of acquisitions of all home sale transactions, including trustee’s sales) cease their buying, the resulting sales volume vacuum will find insufficient numbers of end users to take their place.
Home prices in low- to mid-tier housing will be without sales volume support (which has been waning since November 2012) since end users collectively lack the jobs and income required for their numbers to sustain this mini-bubble.
Your neighborhood and its price level may be the exception, as great wealth has recently been created for the top 1% of the population.
So, you can decide to have irrational expectations. Or, you can choose to be California realistic, and work the operative facts to your best advantage.
Re: Fire burn and caldron bubble from DataQuick