Spring has finally arrived—and popping up with the daffodils is a profusion of breathless news articles, magazine covers, and blog posts announcing that the housing market is back (and just in time for homebuying season). Though signs of recovery are afoot—the S&P/Case-Shiller Home Price Index for 20 major metropolitan areas increased by 8.1 percent annually in January, for starters—some of the news coverage takes the story even further, suggesting that these trends point to the start of a new housing bubble.
The main factor driving the bubble watch is investor activity; around a quarter of homes sold in 2012 were sold to investors. Institutional investors—large-scale buyers with deep pockets, who are seeking large returns—made up an increasing share of these purchases, especially in the Sunbelt cities of Miami (30 percent), Phoenix (23 percent), Charlotte (21 percent), Las Vegas (19 percent), and Orlando (18 percent).
So, if you (like me) are hoping to buy a house in the next few months, should you (like me) be a panicky, hyperventilating mess, worried that the new bubble will price you out of the market before you even start? Let’s take our faces out of the paper bags and take a closer look at the situation.
- Although the bottom of the housing bust may be past, there are several reasons we are probably not on the cusp of another boom. Although investor activity has increased from its lows during the bust, it is hardly taking over the market. Yes, in some cities, hedge funds and residential real estate investment trusts are buying property, but most of the investment activity still comes from individual investors. The majority of purchases nationwide are by owner-occupiers. And more important, investment homebuying was only one of the factors driving the housing boom in the first place, and an arguably less important factor at that.
- The Case-Shiller index represents only 20 metro areas and includes cities where prices have posted double-digit annual price gains: Phoenix, Las Vegas, Miami, Los Angeles, Detroit, and Atlanta. Looks familiar? These are cities where prices fell substantially during the bust. Starting from such a lowered base, any price growth will look more dramatic. Nationwide, the Zillow Home Value Index reported an annual gain of 5.8 percent in February. Not bad—but not 8 percent.
- What if these cities are just leading the pack? Housing affordability relative to renting is at a record high due to low interest rates, which will likely increase demand and put upward pressure on prices everywhere, right? Well, these super-low interest rates are only available to people who can qualify for a mortgage. With a quarter of homeowners still struggling with underwater mortgages, stagnant incomes, and persistent unemployment, the pool of potential homebuyers remains shallow. This limits the potential for low interest rates to contribute to house price growth.
Let’s all take a deep breath. I would say that the bubble is not in the housing market, but in the media’s coverage of it. While the housing market recovery is good news, let’s hope the next bubble is far off… or at least doesn’t start until I find my house.
Photo by Flickr user ChrisBohn used under Creative Commons license (CC BY-SA 2.0)