Real Estate Bubble?

[kgtest]

In our area Price per sq ft is going at about 165 on the low end to 225 high end on the golf course or lake. We are in between probably around 190. I bought for $122 6 years ago so we have appreciated about $11-12sq/ft per year. or a 9.1% annual appreciation, YMMV.

Zillow has us listed at $161.5/sq ft and Trulia is the exact same.

The county has us assessed at $138 down from $140 last year.
They used to break out land value, but I can't seem to find that information...a 2 acre lot just across the way on the golf course just sold for $250k. My guess is they build 2 800-1MM homes their. FOUR!

Affordability is the key in my area. I would/am upgrading my job, but avoiding the life creep, paying this sucker off early and setting sail into the sunset with y'all!

 

[chassis]

We live in Michigan across the lake from Chicago. Real estate agent said our real estate being driven by Chicago area people moving in. Most seem to be second homes, not primary.

Yes this is correct. A trend since Mr. Capone was around, maybe before that.

 

[pjigar]

See link - I think this is a good read. Sorry if repost.

https://www.mauldineconomics.com/frontlinethoughts/tiny-housing-bubbles

All valid arguments here but.....


1. The following is down-played:

Intended or not, the policies that bail out our government should also serve to cap mortgage rates at historically low levels. That’s another bullish factor for home prices.

I don't see how long real bond yield can stay negative. Which means mortgage rate can creep back up as much as inflation or more.



2. What about the leveraged effect of rising mortgage rate rise? Housing affordability is more tied with interest rate than income due to 5X leverage so rising rates will have significant effect on pricing.


3. If boomers are going to "downsize" then what happens to those houses? Doesn't that mean it will be available as supply of more houses?


4. The effects of COVID (both on demand size and supply side) are more temporary than people think. Do you think lumber shortage and housing shortages are going to be around 2 year from now? Do you think people will still want to give up their downtown-lifestyle after we have this virus under control like flu?




All in all, the charts/data picked in this article (like so many others) are selected to prove a point. YMMV but I think mean reversal ALWAYS happen. Dominoes always fall but we generally can't predict how and when. "This time it is different".

 

[JoeWras]

3. If boomers are going to "downsize" then what happens to those houses? Doesn't that mean it will be available as supply of more houses?

I've been thinking about this during this bubble talk. What I'm seeing (just an anecdote) is that most of my boomer friends and family are hanging on to their houses as long as possible. Only the oldest boomers (pre 1950 birth) are finally moving to CCRCs and that kind of thing. Even so, only a fraction of them are.

In other words, we're in a unique position at this time. The boomers are still alive and thriving. Meanwhile, their kids are finally settling down. Both want houses.

In time, the boomer bust will occur, but we're not there yet. So yes, there will be a supply surge, but the big surge is likely still a decade away.

 

[pjigar]

I've been thinking about this during this bubble talk. What I'm seeing (just an anecdote) is that most of my boomer friends and family are hanging on to their houses as long as possible. Only the oldest boomers (pre 1950 birth) are finally moving to CCRCs and that kind of thing. Even so, only a fraction of them are.

In other words, we're in a unique position at this time. The boomers are still alive and thriving. Meanwhile, their kids are finally settling down. Both want houses.

In time, the boomer bust will occur, but we're not there yet. So yes, there will be a supply surge, but the big surge is likely still a decade away.

I agree with you. My comment was to counter the hypothesis in the article that said boomers needs smaller houses. I think the hypothesis is incorrect like you pointed out.

 

[Montecfo]

4. The effects of COVID (both on demand size and supply side) are more temporary than people think. Do you think lumber shortage and housing shortages are going to be around 2 year from now? Do you think people will still want to give up their downtown-lifestyle after we have this virus under control like flu?

I think you are right about lumber. But many cities have become undesirable due to rapidly increasing crime rates and security concerns.

Also, the work from home genie is not going back into the bottle so less need to live in cities.

 

[JoeWras]

I agree with you. My comment was to counter the hypothesis in the article that said boomers needs smaller houses. I think the hypothesis is incorrect like you pointed out.

Worse yet, even the few that are downsizing are now competing with the first time buyers!

It is interesting times.

 

[kgtest]

Some other observations others made is interest rates are historically low, but potentially trending up with the yield... inventory is low. Credit requirements for loans are getting a little tighter. Not sure about the labor market, but all things aside that has also shifted to WFH for A LOT of blue collar jobs. I haven't been to an office in over a year, got a new job while fully remote and am still just as productive (when the little ones are occupied).

All that being said I think it all just adds fuel to the price margins. Then, that "fear" factor or FOMO. I originally bought because I was 15minutes "from both downtowns" but now with this WFH change and really probably more my change into a suburban family man the desire to even go downtown is less appealing. We discussed moving, but again it costs money to buy and sell, with commission, moving and fees... instead we chose to improve what we have more to our liking and that has been fruitful and fun. We now have the most expensive home on the block after 6 years of sweat equity and persistence when we moved in we were 3rd in this category.

I can't imagine renting. So we own rentals, that is the other side of the market. My tenant broke up and was gonna move out..until she wasn't. WHY? Because she can't afford what we are giving her if she did move. Same as if I could probably hardly afford the home I live in now if I bought it today, 6 years later. It would be like being house poor for the first year or two again as we kind of were when we moved into the McMansion.

You are just getting less for your money. Inflation? Bubble? Rising Yields...all of the above. I think its that massive chemical reaction that causes a burst. But their does need to be a bubble and if the lending standards and Stress Tests that we all did away with will cause another sub-prime... with unqualified buyers who can't afford being put into mortgages they will never succeed with...it becomes short sale and foreclosure.

Commercial real estate might be the thing we SHOULD be discussing?

 

[pjigar]

You are just getting less for your money. Inflation? Bubble? Rising Yields...all of the above. I think its that massive chemical reaction that causes a burst. But their does need to be a bubble and if the lending standards and Stress Tests that we all did away with will cause another sub-prime... with unqualified buyers who can't afford being put into mortgages they will never succeed with...it becomes short sale and foreclosure.

I don't know about sub-prime but don't forget mortgage forbearance and eviction moratorium. Those should theoretically ease the supply side once expired.


We just signed a contract to sell our house yesterday. We priced the house a hair below the average comps from last month. Lowest offer was $5K over asking and highest was $40K over asking. The $40K over asking was with 60% cash down and site unseen! 5 offers in 3 days.

 

[jrcunniff]

Purchasing site unseen blows me away. I get that you can see pictures, even virtual tours, but don’t people understand nothing replaces seeing things with your own eyes? I’m not sure if this is more due to inexperience or desperation.

 

[pjigar]

Purchasing site unseen blows me away. I get that you can see pictures, even virtual tours, but don’t people understand nothing replaces seeing things with your own eyes? I’m not sure if this is more due to inexperience or desperation.

I know, mind boggling. FWIW we did not accept that offer from site unseen guy!

 

[Fermion]

I wish we could get a bubble in something I own one of these times. Like socks with holes in them...why can't we ever get a bubble in those?

 

[ivinsfan]

I know, mind boggling. FWIW we did not accept that offer from site unseen guy!

Why not since he was highest bidder?

 

[pjigar]

Why not since he was highest bidder?

We focused on lot of soft factors (gut feeling) mostly focusing on ability to close. We have had people not close on multiple occasions for one reason or other on previous transactions. And I have done couple of dozens RE transactions!

 

[ivinsfan]

We focused on lot of soft factors (gut feeling) mostly focusing on ability to close. We have had people not close on multiple occasions for one reason on other on previous transactions. And I have done couple of dozens RE transactions!

I thought maybe you got a 100% cash offer..and them not seeing the house would make you a little uneasy.

 

[jkern]

People say that houses in some markets command high prices because of demand. Sure, but is that demand real, or is it because of FOMO?

I have read that one way to verify is to use the rent in the same market. If you cannot buy a home with a mortgage, and rent it out to at least break even, then the demand is not real. If the rent is low compared to home prices, then it means that people there do not make enough to buy the homes nor to pay the rent, and high prices are not sustainable.

I recall the superhot home market in the metropolitan Phoenix in 2005-2007. A friend of my mother visited her from DC. The friend was buying a new home in Anthem (north of Phoenix, on the way to Sedona) to flip. She eventually ended up stopping payment, losing her down payment, and letting the bank foreclose it.

This isn't universally true. In the SF Bay Area Real Estate purchased with 20% down will never rent for the total cost of buying (P&I, Property Tax, Insurance, maybe HOA) and it never has (at least since the 1960s). It has always been more expensive to buy vs rent with maybe an exception during the big crash of The Great Recession.

 

[jkern]

Unfortunately it seems that inflation is not a measure against things that actually affect most every day people. Food, Fuel, housing, all not counted. Seems like a made up metric to me. Our costs have gone up 20% over the past 2 years, but inflation is ~0, go figure.

My Rental Insurance went up 105% this year alone. My home utilities (Garbage, Water, Gas, Electric) rise at least 5% per year. My theory is that goods and services that require "boots on the ground" (local labor) go up faster that the CPI and goods and services that can be offshored go up slower that the CPI.

 

[l8_apex]

This isn't universally true. In the SF Bay Area Real Estate purchased with 20% down will never rent for the total cost of buying (P&I, Property Tax, Insurance, maybe HOA) and it never has (at least since the 1960s). It has always been more expensive to buy vs rent with maybe an exception during the big crash of The Great Recession.

Hmm, I'm not so sure about that. I bought my '60s 3 bed 2 bath 1600 sq ft home in Santa Clara in 2011 for $640k. That would have rented for $3500. I'm pretty confident in that number as I tried to find a home to rent before I resorted to buying. $480k at 3.0% was $2,040/mo for P & I. It's an anecdote obviously, and I still remember how much homes in the pricier cities cost back then, to say nothing of what they cost now.

 

[RunningBum]

We focused on lot of soft factors (gut feeling) mostly focusing on ability to close. We have had people not close on multiple occasions for one reason or other on previous transactions. And I have done couple of dozens RE transactions!

Yeah, I get the feeling that someone offering site unseen is just doing that to try to hold a property until they can see it before closing, and then try to back out of negotiate down. Unless they come with high earnest money too, but they could still probably find a way to back out and get their deposit back.

 

[pjigar]

Yeah, I get the feeling that someone offering site unseen is just doing that to try to hold a property until they can see it before closing, and then try to back out of negotiate down. Unless they come with high earnest money too, but they could still probably find a way to back out and get their deposit back.

Exactly. Buyers in Texas have "option period" of typically 10 days in return of paying a nominal sum of $100-200 to seller where buyer can walk out of the contract for any reason within 10 days. We went with an offer with shorter option period and higher option fee.

 

[Willers]

We live in a small town in Colorado and what we're seeing:

- Construction costs (labor shortages and material costs) have driven the cost of building up more than 50%+. I just had a builder friend tell me that he had a call a potential client and break the news that his $800K build discussed in the fall is now $1.8M.

- Although technically short-term rentals are illegal, the county commissioners and their general counsel have decided that STR's are "too hard to track" so they are just allowing them to happen. It is a great deal for the county since they collect the occupancy tax charged by the sites but don't need to do any oversight or regulation. What used to be too expensive to hold is now doable because of the VRBO/ABNB rents. This has radically decreased the number of homes for long-term rent or sale.

- This lack of rentals is leading to a catch-22. I can get a great price for my house, but then I have nowhere to live. Sale contingencies are a no-go here. Many are deciding that changing homes isn't worth it. Even if you find a rental you are now seeing 2%/mo increases while you look for a new place.

- Finally, we're seeing a literal flood of out-of-state money coming in. I've never seen so many CA plates before. Realtors are telling me they have dozens of cash buyers, mainly from CA, OR, WA, and TX, waiting their turn. One said that the buyers are desperate not to miss out since mountain towns are quickly appreciating out of reach.

It is certainly entertaining watching the hordes descend every time a new property comes on the market. We have to be careful not be run down by Range Rovers on our walks. Can it last? Just when I think it can't I look at Aspen and Telluride and think that there may not really be a limit.

 

[jkern]

Hmm, I'm not so sure about that. I bought my '60s 3 bed 2 bath 1600 sq ft home in Santa Clara in 2011 for $640k. That would have rented for $3500. I'm pretty confident in that number as I tried to find a home to rent before I resorted to buying. $480k at 3.0% was $2,040/mo for P & I. It's an anecdote obviously, and I still remember how much homes in the pricier cities cost back then, to say nothing of what they cost now.

The year 2011 was probably at the bottom of the big crash. Could be an exception. Rents haven't changed as much as the RE purchase price has. My wife has a 3 bed, 2 1/2 bath, 1645 ft2 TH in San Jose. It rents for $3400 and it's current value is about $1M.

 

[2lhasas]

After looking at the cost of apartments in my son's college town, we decided it would be worthwhile to purchase something instead of renting. We were looking at properties under $250K, which was probably a sweet spot for first time homebuyers. Starting at the end of the year, we would schedule to see a property as soon as it was listed. Within 24 hours the seller would have multiple offers and the home was off the market within 48 hours. Some of the listings would literally say open for viewing on Saturday, accepting offerers until noon on Sunday. It was nuts.

We were fortunate to find a flipper who hadn't listed the home yet. We were paying cash and offered to close in 2 weeks, and he was happy to get his money out and move on to his next property. We ended up getting it for $25K less than a similar home in the same subdivision sold for a week later, and still paid $18K more than the most recent sale in the subdivision, which was only 2 months earlier.

 

[harley]

sight unseen. The site was unseen.

 

[Oz investor]

given the willingness of some governments to disrupt the economy over surges in positive virus tests , i would say ABSOLUTELY

how many can guarantee they can keep up with mortgage repayments now

it is one thing to BUY a property , and another to repay the loan in a timely manner ( especially if you are relying on rental income to do so )