With each passing day, and each new financial bubble, it becomes more and more difficult to figure out what exactly is “normal.” That said, we can say with near certainty that home prices are not supposed to behave like this:
Home prices in markets that bubbled over back in 2006/2007, like Las Vegas and San Francisco, got cut in half in 2009 but have since doubled again of their lows. Meanwhile, markets like Denver and Dallas that didn’t participate as much in the 2007 mania are now surging to all-time highs, with Dallas prices up 55% over the past 5 years.
Even the 20-City Composite Cash-Shiller Index shows that average prices have surged 44% off their lows and are nearly back to their 2007 peak.
As the Wall Street Journal points out today, some of the home buying behaviors of consumers, like paying prices well above appraisal values and waiving home inspections, are starting to be eerily reminiscent of 2006.
In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.
“It can’t be sustained,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, referring to the frenzied buying. “It can’t go on forever.”
Per the chart below, homes in a dozen major markets have increased over 50% off their 2012 lows while many have already exceeded their previous bubble peeks.
Meanwhile, there are other signs of overexuberance as well including surging levels of licensed Realtors all chasing a quick buck.
The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns.
In Denver, homes are selling briskly. The median number of days that homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to Redfin. Home prices rose 8.5% in Denver over the year ended in February, according to Case-Shiller.
Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price.
“It’s just crazy,” she said.
Martin Mata, a Redfin agent in Denver, said his buyers often will commit to kicking in extra cash if the bank’s appraisal comes in lower than the purchase price. “We’ve got to be coming close to a plateau for prices,” he said.
But perhaps the scariest warning of all comes from the number of economists who were all too eager to reassure the WSJ that all is well.
With little risk of a supply glut in the near future, economists generally expect prices to continue rising quickly in most markets for a couple more years, if the economy keeps expanding.
They said it is more likely that overheated markets are headed for a long period of flat or slightly declining home prices, especially if mortgage rates rise or job growth slows, but not an outright crash.
The market “is not going to burst, it’s going to contract” with falling sales volume, said Nela Richardson, chief economist at Redfin, a real-estate firm. “You might still see what looks to be a robust market because prices are really strong, but that doesn’t mean it’s a broad market.”
Alas, we’re sure the economists are right this time around.
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