‘B-Word’ Creeps into Housing Discussions
With mortgage rates still low and housing inventory scarce, some people in the housing industry are starting to use the “b-word” again.
As in, “bubble.”
Zillow Inc, Seattle, released its quarterly Home Price Expectations Survey of analysts in 20 local housing markets. More than one-third of respondents said they believe that San Francisco’s housing market has become so unaffordable that they believe the market is already in a bubble; another 20 percent said they believe the San Francisco market is at risk for bubble conditions within the next year.
The survey, conducted by Pulsenomics LLC, asked more than 100 panelists about their expectations for the housing market. Of those, 66 answered a question about bubble conditions in 20 local housing markets. Responses said they believed some housing markets are over-valued, although Zillow reported “significant disagreement over whether the rapid home-value growth in those markets puts consumers at risk.
“A handful of markets–especially the Bay Area–are very hot right now, and it’s possible home values may actually begin to fall somewhat in these places as more residents are priced out amidst rising affordability concerns, especially when interest rates rise,” said Zillow Chief Economist Svenja Gudell. “Whether those local conditions constitute a ‘bubble’ is up for debate, even among economists. Without 20/20 hindsight, it’s difficult to identify bubbles as they’re happening, but it is very clear that nationally we are not seeing a return of the conditions that caused the last national bubble.”
Mike Fratantoni, chief economist with the Mortgage Bankers Association, said circumstances in 2015 appear to be different than between 2004 and 2007, when several bubble markets did emerge.
“You had markets in which interest rates were probably lower than they should have been and credit was more readily available,” Fratantoni said. “We also had a very high level of home-building activity in which construction likely got ahead of demand. Once the economy started to turn, the housing market experienced several shocks to credit that left many markets and homeowners in tough spots.”
What’s different this time around, Fratantoni said, is that single-family housing construction has yet to substantially pick up and inventory remains low, which is driving up home prices. “Buyers can’t find homes to purchase,” he said. “Home prices are always going to be high in San Francisco, but other markets right now are not overbuilt. I don’t see a lot of bubble happening given conditions right now.”
“Tighter lending restrictions today mean we aren’t seeing buyers get loans they realistically can’t pay back, like we did in years past,” Gudell said. “It’s significant that some experts are starting to worry about bubble conditions, but…there’s no real danger of a severe crash like the one we all remember from the last decade.”
Nonetheless, several analysts in the Zillow survey said they believe bubble conditions are already present in Miami, Los Angeles, Houston, San Diego, and Seattle. A quarter of respondents said they think there is significant risk of a housing bubble in the next three years in Boston. (The same number of panelists said there is no risk of a bubble in Boston in the next five years).
Zillow noted bubble fears are coming to the surface even as home values overall are expected to gradually level off over the next several years, resulting in a national median home value of more than $215,000 by the end of 2020.
“The long-term outlook for U.S. home values has diminished to a three-year low, and a clear-cut consensus among the experts remains elusive, even at the national level,” said Pulsenomics Founder Terry Loebs. “The divergence of expert views regarding the existence of regional price bubbles and the path of future home values is a reminder that the U.S. housing sector has yet to fully heal more than eight years after the epic bust, and that significant risks have re-emerged within certain large metropolitan area housing markets.”
