Now that the media is hyping our local market once again with horror stories of multiple offers, and media proclaimed “Bidding Wars”, our attention turns to watching for signs of a change in the tempo of sales and/or over asking offers. Everyone knows the Peninsula housing market is red hot, and has been for more than a year now. The question now becomes, “When will it change?”
Some Pundits are already predicting a crash in what they perceive as an overheated housing bubble. Of course if they continue droning on about a market crash their theory eventually may come to fruition, but for now their bubble is more akin to a hot air balloon with scant facts to back it up.
The Case-Shiller report by Standard & Poor’s is a good macro-barometer of our Bay Area housing market and the nation as a whole. The Case-Shiller report, most recently released on September 24th 2013, showed an increase in the 20 largest housing markets across the country. In our area or “MSA” (Metropolitan Statistical Area), which includes the Napa, San Francisco, San Mateo Alameda and Contra Costa Counties, the index had risen 25% from July 2012 through July 2013 [Case-Shiller reports are delayed by three months so the September reports was actually for July].
Economists, like the National Association of REALTOR’S Lawrence Yun, have warned that prices have been rising “too fast” and at these double-digit rates of appreciation are “unsustainable”. We couldn’t agree more. The current rate is unsustainable in the long run, but we believe that many factors already in play will mitigate the danger of a bubble. But let’s take a small step back. Part of the reason that home prices have increased so dramatically is that in many areas they were below reasonable market values for so long that just returning to normal would be a huge increase. Many areas saw homes values plummet below the cost of construction. Home prices have not reached the May 2006 peak where the SF MSA stood at a whopping 218—24% higher than today. At the current rate of price increase home values would reach the peak seen in May of 2006 in one year from now.
We don’t believe that will happen—not even in the crazy Bay Area real estate market. Why?
What’s already in play to slow the engine of appreciation and avoid another economic train wreck?
- More homes are being built as companies try to meet the new housing demands—this takes pressure off of the tight inventory
- Interest rates will begin rising making homes less affordable—this will put pressure on price increases and most certainly limit over asking offers
- More equity sellers are being created every day—more inventory will mean less upward pressure on prices
- Investors are taking a break—as interest rates rise and unbelievable deals once had from the recession are gone, investors look for other opportunities outside of housing. Less competition for homes will help keep a lid on housing inflation.
According to the Case-Shiller study, “Since April 2013, all 20 cities are up month to month; however, the monthly rates of price gains have declined. More cities are experiencing slow gains each month than the previous month, suggesting that the rate of increase may have peaked.
Morgan Brennan who writes for Forbes Magazine on U.S. Housing markets, summed it up best in her article back in June titled “3 Reasons The ‘Bubble-Like’ Surge in Home Prices Won’t Last“. And since we agree with her sentiments, rather than re-invent the wheel we rather encourage you to read more about her theory.
Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 20 years experience in helping sellers and buyers in their community. They may be reached at (650) 508.1441.
The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.