Real Estate Bubble?

[Fermion]

I need to find a house and am seriously thinking about buying a run-down shack for $60k and putting up with it for a few years until prices get better.


If they never get better, I'll just learn to live with it. This is not how I wanted my life to go, but my timing is so bad that I should've expected it.

Non-water front land is still really cheap in our area, not sure about yours. The prices drop off like crazy the distance you get from a river/lake. 0.5 acres on a lake for $600,000, 5 acres a half mile from the lake, $40,000.

Just don't try to build anything right now. You will spend $60,000 just on OSB

 

[Surewhitey]

+1. I just had my roof replaced this month. Quoted hourly rates for roofers ranged from $40-$80! We'll be seeing carpenter work billed at $100/hr soon in these parts; labor costs are up. Millennials are moving from downtown into the suburbs, so demand is up. Lumber and plywood prices have screamed upwards the last 9 months, so material costs are up.

I think high housing prices are here to stay for long while, just like medical care costs and higher education.

Carpenter here & typically getting $50-70/hr. MCOL area. I'm not looking for w*rk @ this rate...

 

[Fermion]

By the time our house is finished, we will have about 2 years of work by 2 people in it. Say 8000 hours at $20/hr would be $160,000 in labor. Materials cost is around $250,000.

So we have built a 1400 sq-ft house for $410,000 in an area where it would sell for maybe $250,000

 

[retire to nature]

We won't be able to tell if we are in a bubble until it bursts.


[/LIST]
Add to this that the supply side of housing has been limited or decreased over the past decade. Factors potentially impacting supply:

• Stalled or limited new home building due to drops from the 2008 financial crisis
• Difficulty for new homes to built or the high cost of new homes built due to tougher zoning regulations
• Distressed homes being demolished from the 2008 financial crisis
• Hedge funds snatching up tons of foreclosed single family homes and turning them into rentals (When Wall Street Is Your Landlord) during the 2008 financial crisis and beyond.

Without a ton of research, I think we have 10+ years of these underlying macro trends that will be a tailwind to residential housing. Of course, the economy, interest rates and other factors could throw a wrench at us.

But you are missing the death from the covid. I think the number is very high. So the home will come out. I think 10 yrs is too hopeful. How soon the covid end, and ppl try to sell it would be the key in my opinion. Now still ppl are so scared so demand and supply is off set balance causing keep going up.

I am in housing business, so wanna go upper, but I am scared to the death number too.

 

[MarieIG]

The bubble has avoided my block.

My already high property tax went up approx 28% in 2020.

Anybody interested? Anybody . . .

Crickets.

 

[JoeWras]

What metric is that 5-10 pct per month based on?

Checking on listing and settlement prices in our neighborhood. Also, my neighbor is a realtor and he can't keep any inventory so bids are way over listing price. It is his ballpark estimate of the current situation.

Last fall, the general ballpark listing price around here was $320k to $350k. Today, it is $400k to $470. And that is just in the last 6 months, with most of that increase occurring this year, which is where I'm talking about 5 to 10% per month. That's sustained for 3 months. How much more is anyone's guess.

Zillow isn't perfect, but it shows this curve for a nearby home which I find is matching sales prices pretty well:

 

[chassis]

We won't be able to tell if we are in a bubble until it bursts.


I'm a home remodeler and I'm beginning to think we're not going to see a slow down anytime soon. I think people staying at home due to Covid definitely cause a jump in real estate activity for a variety of reasons. However, things were already busy prior. Covid just seemed to pour more fuel on.

Underlying this growth in activity, my hypothesis is that it's due to the forces of two huge generational phenomenons: The Boomers and the Millennials (Millennials - Wikipedia). The Boomers are a huge group and the Millennials (their children) are now just as large. Since adult population drives housing, these two groups have a huge influence on what is happening (economy not withstanding). Here's what I think is happening and driving the overall macro trend (ignoring the short term impact of Covid) and reflects my personal experience:

• Boomers are staying/aging in place and upgrading their homes as they look to retirement
• Boomers are moving (downsizing, changing geography) causing either
  • demand for new housing
  • upgrading/taking care of deferred maintenance of their existing homes in preperation for sale
  • upgrading/remodeling the homes they are moving to
• Boomers are buying second homes to vacation/winter and entice their Millennial children and their grandkkids to visit causing new construction or remodeling activities
• Millennials are now in their prime household formation years and are buying new homes or older homes and upgrading to fit their tastes and lifestyles
• Boomers are helping to supply cash/funding to their Millennial children so that they can afford or bring "cash offers" to the table.

Add to this that the supply side of housing has been limited or decreased over the past decade. Factors potentially impacting supply:

• Stalled or limited new home building due to drops from the 2008 financial crisis
• Difficulty for new homes to built or the high cost of new homes built due to tougher zoning regulations
• Distressed homes being demolished from the 2008 financial crisis
• Hedge funds snatching up tons of foreclosed single family homes and turning them into rentals (When Wall Street Is Your Landlord) during the 2008 financial crisis and beyond.

Without a ton of research, I think we have 10+ years of these underlying macro trends that will be a tailwind to residential housing. Of course, the economy, interest rates and other factors could throw a wrench at us.

100% this. Great post @mrstop

 

[Montecfo]

Checking on listing and settlement prices in our neighborhood. Also, my neighbor is a realtor and he can't keep any inventory so bids are way over listing price. It is his ballpark estimate of the current situation.

Last fall, the general ballpark listing price around here was $320k to $350k. Today, it is $400k to $470. And that is just in the last 6 months, with most of that increase occurring this year, which is where I'm talking about 5 to 10% per month. That's sustained for 3 months. How much more is anyone's guess.

Zillow isn't perfect, but it shows this curve for a nearby home which I find is matching sales prices pretty well:

Thanks for that. Prices can rise in a burst for short periods but we are talking a time when Covid has both limited supply and goosed demand. That won't continue.

But I think above-trend housing prices increases can continue due to pent up demand for HH formation heading back to the financial crisis. But pure affordability will limit that in most markets I expect.

Over the long term housing prices rise at the rate of inflation plus 1 to 1.5 percent.

In our area (suburban DC) inventory is tight and houses have sold over list recently, with a notable burst in prices. But the rate of rise is not sustainable and I do not expect prices to double or anything (at say 7.5 pct per month, midpoint of your range, prices double in about 10 months).

And the highest selling price in the neighborhood remains circa 2006, funny money era.

 

[mrstop]

But you are missing the death from the covid. I think the number is very high. So the home will come out. I think 10 yrs is too hopeful. How soon the covid end, and ppl try to sell it would be the key in my opinion. Now still ppl are so scared so demand and supply is off set balance causing keep going up.

I am in housing business, so wanna go upper, but I am scared to the death number too.

Covid deaths may help free up housing supply, but I can't believe it would be huge numbers. You would have to remove all those who were non-homeowners (i.e. renters, in nursing homes, prisons, living with family etc.). Additionally, there are likely many who are survived by a partner. The aging and mortality of the boomers will likely have a much larger impact on loosening housing supply than Covid deaths.

 

[MichaelB]

I wouldn’t be so certain this is temporary. When looking at the US population by age, in 5 year cohorts, the two largest are 25-29 and 30-34. This is much different than a decade ago, when the largest cohorts were much older. (45-55). Source is Calculated Risk blog, here.

This trend will accentuate over the next decade. By 2030, the four largest cohorts will be 25-45. These age groups are ready for upward mobility, marrying, having families and buying homes.

The sharp increases in price may not continue, but the age breakdown looks like there will be steady demand for single family housing for the next decade.

 

[Montecfo]

I wouldn’t be so certain this is temporary. When looking at the US population by age, in 5 year cohorts, the two largest are 25-29 and 30-34. This is much different than a decade ago, when the largest cohorts were much older. (45-55). Source is Calculated Risk blog, here.

This trend will accentuate over the next decade. By 2030, the four largest cohorts will be 25-45. These age groups are ready for upward mobility, marrying, having families and buying homes.

The sharp increases in price may not continue, but the age breakdown looks like there will be steady demand for single family housing for the next decade.

Yes. You are describing the pent up demand for HH formation that I referred to. That is why I think pricing growth can remain above historical trend. But again, wage growth is a limiter and interest rates will be also. So I think the gains will be single digits annually on average.

 

[ivinsfan]

I wouldn’t be so certain this is temporary. When looking at the US population by age, in 5 year cohorts, the two largest are 25-29 and 30-34. This is much different than a decade ago, when the largest cohorts were much older. (45-55). Source is Calculated Risk blog, here.

This trend will accentuate over the next decade. By 2030, the four largest cohorts will be 25-45. These age groups are ready for upward mobility, marrying, having families and buying homes.

The sharp increases in price may not continue, but the age breakdown looks like there will be steady demand for single family housing for the next decade.

Well let's see how the trend of living in Mom and Dad's basement, marrying late if at all, and having few if any kids shakes out...upward mobility requires a good economy and a motivated and educated workforce. There has been a lot of hand wringing on several threads wondering if the economy can keep motoring along. If I'm a young adult living in the Bay Area and don't want to leave, what kind of job am I going to get that lets me buy my own home?

 

[jim584672]

I remember a few years ago all the Millennials seemed like they wanted to be permanent renters. Now it seems like they all got married and want to be homeowners.

Sort of an echo baby boom as the Boomer's children flood the market.

Last year a condo by me went for $320,000. Same condo listed today at $449,000.

 

[JoeWras]

We're way ahead of the 2008 highs in this market. Every market is different.

NC also has the unique issue of migrants from higher priced markets. I think karen mentioned this earlier. We've seen waves in the past, but this influx seems huge. We get folks coming from NY, for example, who are used to half million dollar homes. They come here and see the equivalent at 300k and have no problem making a rising cash bid.

 

[Montecfo]

JoeWras,

You are correct and I would guess buyers are seeing a lot more value there than here, and accordingly greater room for the price moves you have described.

 

[Walt34]

We get folks coming from NY, for example, who are used to half million dollar homes. They come here and see the equivalent at 300k and have no problem making a rising cash bid.

That was the effect on us 20 years ago coming from the DC area. Put this house in the DC area and it's multi-millions, according to Zillow it's market value is $326k, and that's up 10% in just the last month. That's insane and not sustainable. And probably not realistic either.

But 20 years ago we found ourselves looking at nicer houses than we ever dreamed we'd be living in, and because of the sale of our paid-off house near DC we could write a check for it. And so we did. Probably a lot of that going on now.

 

[Surewhitey]

We're way ahead of the 2008 highs in this market. Every market is different.

NC also has the unique issue of migrants from higher priced markets. I think karen mentioned this earlier. We've seen waves in the past, but this influx seems huge. We get folks coming from NY, for example, who are used to half million dollar homes. They come here and see the equivalent at 300k and have no problem making a rising cash bid.

For sure in Dallas (not greatly affected in 2008). We moved to California from Dallas in 07-08. Sold our home for $168k. Today the same home could get you $300k, easily. Dallas is still affordable by those #'s, but it has greatly appreciated in the past 5 years or so.

DD bought their home in 2012 for $180k & is easily able to get $350k today.

 

[jrcunniff]

Once forbearance ends and mortgages - and rent for those mortgages - are due, there will be a greater supply due to foreclosures. I doubt there have been many foreclosures recently due to COVID hardship allowances.

Might not be enough to send prices down, but potentially could level off prices.

 

[Another Reader]

Once forbearance ends and mortgages - and rent for those mortgages - are due, there will be a greater supply due to foreclosures. I doubt there have been many foreclosures recently due to COVID hardship allowances.

Might not be enough to send prices down, but potentially could level off prices.

The percentage of loans in forbearance is actually quite low. 4.5 percent currently, per the MBA.

https://www.mba.org/2021-press-rele...loans-in-forbearance-decreases-to-450-percent

The feds will take more steps to prevent them if necessary, a la HARP 2. As soon as it's possible to evict, landlords will do it. I don't see any problem absorbing whatever foreclosures do occur.

 

[mrstop]

Once forbearance ends and mortgages - and rent for those mortgages - are due, there will be a greater supply due to foreclosures. I doubt there have been many foreclosures recently due to COVID hardship allowances.

Might not be enough to send prices down, but potentially could level off prices.

The percentage of loans in forbearance is actually quite low. 4.5 percent currently, per the MBA.

https://www.mba.org/2021-press-rele...loans-in-forbearance-decreases-to-450-percent

The feds will take more steps to prevent them if necessary, a la HARP 2. As soon as it's possible to evict, landlords will do it. I don't see any problem absorbing whatever foreclosures do occur.

Hedge funds are also likely standing by, salivating, to take more properties.

 

[LRDave]

The percentage of loans in forbearance is actually quite low. 4.5 percent currently, per the MBA.

https://www.mba.org/2021-press-rele...loans-in-forbearance-decreases-to-450-percent

The feds will take more steps to prevent them if necessary, a la HARP 2. As soon as it's possible to evict, landlords will do it. I don't see any problem absorbing whatever foreclosures do occur.

And as I mentioned earlier in the thread, the short selling arm of the residential real estate industry is itching to get back to work. I bet lenders will be willing to write down some losses to get the bad loans off their books and there will be plenty of buyers waiting on the other side of the transaction.

 

[OldShooter]

Hedge funds are also likely standing by, salivating, to take more properties.

I remember when the Japanese were going to own America, then it was the Saudis. Ho hum. I'd be curious to know what the corporate history on residential real estate has been and the trend. My guess, unhampered by any actual facts, is that large corporate ownership of small residenial properties is negligible.

 

[Finance Dave]

I was at a presentation by a Realtor discussing our local market. Like many, it is really hopping. Home values going up $15k every two weeks, limited inventory, offers with no contingencies going $50k over asking on first bid. The realtor discussed her thoughts on why-Covid making our rural market more desirable, etc.

I asked-if people are moving here they must be leaving somewhere. Supply and Demand what it is, that means the market is down somewhere. Where?

She claimed the market was up everywhere, but insisted she expected no imminent crash and we weren't in a bubble. How's that work?

Makes no sense to me. First off, anyone who buys a house without an inspection contingency is ...well I won't say the word.

Secondly, the house must appraise for the sale price or the bank won't loan that much...then the buyer will have to either come up with the extra money or decline the purchase.

I am a retired home inspector, and I can't tell you how many deals I saw fall through for a whole host of reasons.

I don't understand your comment about "that means the market is down somewhere"...that makes no sense.

 

[Finance Dave]

I can only speak to our market, Atlanta metro. Zillow says our house has increased 11% in the last 30 days. An aquaintance bought their first investment property. They were excited because they beat out 32 other offers. My bet is on bubble.


ETA: But as we know, bubbles can go on for years.

Zillow is notoriously WRONG. I have 5 rentals and I belong to a landlord association. We have done comparisons between actual selling prices and the "Zestimate" that Zillow publishes...they are often different by 20% or more.

 

[Finance Dave]

What many call Bubble is just another incarnation of Inflation. Which many refuse to admit is rampant right now.

- Building costs have doubled
- Labor costs have spiked (if you can find someone to do the actual labor)
- Everything else has gone up.

A house is just culmination of all these things, plus some local factors (based on location). But too much Stimulus money is floating around the system. Most everyone's (who is not running his own small business) income has been going up as well. People who were working for $12/hr last year, don't want to come back less than $18/hr. You do the math.

Too much deficit spending does impact one segment - those reliant on fixed income. Sad but true.

I think this is the closest thing to the truth.