Are home prices overvalued?
“We are heading for a market crash!” This has been told to me by people that I respect and trust to analyze the market trends. I decided to spend a few hours researching the data myself to gauge the direction of the California real estate market. I started with the obvious unemployment figures are historically low at 4.3% and the Wall Street Journal just predicted that the GDP for 2018 will be 4.4%. Both are super strong indicators of a healthy market. Additionally, as a mortgage broker and insider in the industry, lenders have stopped the easy financing policy of stated income or negative amortized loans. In fact, borrowers have much greater vested interest in their properties than they did 10 years prior. If these figures are correct, why am I hearing panic of another real estate bubble coming from those I trust and respect. I decided to peel back the onion a bit further to see if this was truly as strong an economy that the numbers show.
I reviewed the median house price in California over the past 28 years and compared it to the median income during the same period. I noticed that when average income is above 20% of median home price, then prices seem to be steady or grow. In 2007, at the peak of the bubble, average income was at 9% of median home prices; and today we are at 13%. Consumer credit card debt is also at an all time high. In 2013, American Consumers owed $74 billion in revolving debt while today it’s $104 billion. If the Feds raise rates just slightly, this would have a tremendous impact on consumer cash flow and effect their ability to purchase a home. Over the past 3 years, Denver has been one of the hottest real estate markets in the country. Each month, home sales and the median sale has risen during this period. In June, sales dropped 5.5%. Realtors, according to CAR, say the slowdown has to do with overheated prices in the area.
Interest rates impact housing prices. Mortgage rates follow the 10 year treasury note daily trend. When institutions and other govt’s buy US Treasuries, the price goes down as there is little incentive to attract more buyers to purchase treasuries. On the flip side, mortgage rates go up if fewer treasuries are held. Russia just this week sold 80% of their US Treasuries (why?).
As we all try to read the tea leaves and magic 8 ball, we can only speculate as to what the future holds. Will the tariffs imposed by the administration lead to a trade war or a more productive American trade balance? Still with plenty of uncertainty out there, I believe the housing market will decline slowly over the next 5 – 7 years. No where near the dramatic decline of the 2008 housing bubble, but certainly a correction, possibly a mild one, is due.
Mark Gurich/ mortgage broker
July 30, 2018