first tuesday and the St Louis Federal Reserve agree: 2013’s housing bubble was directly the result of speculator over-activity.

Some distinguishing factors the St Louis Fed study highlights about this recent pricing boom include:

  • the most significant price change was seen in low-tier homes;
  • cities which experienced the steepest declines during the 2008 recession saw some of the most rapid growth in 2012-2013; and
  • the homeownership rate declined in nearly all the locales experiencing quickly rising prices.

The study concludes the mini bubble of 2012-2013 was completely reliant on “private and institutionalized investors” – speculators.

The distinguishing factors brought out in the Fed study are not limited to a national scope: California’s recent home price boom was entirely due to speculator over-activity. As the speculators continue their exit, the bubble will deflate.

There is a distinct lack of end user homebuyer demand in 2014. This is due to:

  • the still-recovering jobs market;
  • a declining buyer purchasing power (as mortgage rates remain high and incomes remain stunted, homebuyers are unable to meet today’s too-high home prices); and
  • an unwillingness to compete with speculators at today’s elevated prices (causing many homebuyers to leap straight into the open arms of builders).

Expect prices to continue to deflate through 2014, bottoming in 2015. The next stable rise in home prices will be at the end of this decade once first-time homebuyers collectively gain sufficient income and savings to make their move on the housing market. In the meantime, look to urban centers for future growth, as this new generation of first-time homebuyers prefer the conveniences and amenities of city living to their parents’ outdated suburban lifestyle.