Are US Real Estate Markets really rolling?

Today there was an article by Jason Lange from Reuters that the "U.S. housing recovery rolls on as groundbreaking rises".  Here is the link to the article http://www.reuters.com/article/email/idUSKCN0I619U20141017

The article goes on to explain that people are starting to build again.  Normally, people look to this number to dictate whether or not the Housing Markets are strong.  Personally, I think there are other indicators of the Housing Market strength than this number.  Certainly, by itself, it is meaningless.  You have to take into consideration all of the factors before looking at this one number and making a judgement that anything is "rolling" anywhere.  Obviously, being a Realtor, I am always looking for good news to share about the real estate markets. We have been through so many years of pain that all signs of good news come with hope.  However, given how hard the U.S. Housing market got it, you can't blame me for being a little skeptical about the good news especially when the market seems so fragile.  Let me explain.

There are 3 things I am worried about.

1. Yes, values are on the rise.

But, if you look at the data closely, you will see that in Ventura County, the Median Price of single-family homes increased by 43% from December 2011 to July of 2013.  Amazing!!!  But why did that happen? Was it sustainable? Most of the growth during this time frame came from a massive influx of investor capital not only into Ventura County, but into any real estate market that Wall Street Capital thought could produce a return.  Much of this capital was buy and hold strategy taking a lot of the normal inventory off the market permanently, or at least until the strategy turns to "buy-hold-SELL".  What happens then? What happens when Wall Street decides that its time to sell these assets? Will there be enough non-Wall Street buyers to sustain prices? Most think that each investor will have their own thoughts and needs on when it is the right time to sell these assets so the impact won't be as great as the increases I have outlined above.  Since July of 2013, values are only up 1.3%.  This is actually below the rate of U.S. Inflation in August of 2014 of 1.7% as outlined by the U.S. Bureau of Labor Statistics.

2. Interest rates can't sustain these levels.  The article even mentions this when it says that the Housing Market "suffered a setback last year" (right about July of 2013) "when interest rates spiked".

I don't even think we will need a "spike" for rising rates to have an impact on this market.  When the average homeowner has a rate of 3.75% on their 30-year mortgage, will they make the same move-up purchase they would have if rates are now 5%? Will the First-Time-Homebuyer be able to even enter the market if rates are at 6%? I suspect not unless the U.S. economy or the DJIA is up significantly to offset the higher rate.  We will have to see continued declines in the jobless rate and similar increases in the Labor Force Participation Rate and overall wage growth in order to sustain increasing interest rates.

3. My last concern is the increasing trends we are seeing in the level of available inventory.  Inventory of single-family homes in Ventura County is up 58.9% from the same time a year ago. While these levels are historically in line with a healthy real estate market, the increasing trend is far from healthy.  What will happen to these inventory levels when we begin to see the homes that are breaking ground now hit the market? With groundbreaking up 6.3%, per the article, I am concerned that the additional increases of homes available for sale will continue to put downward pressure on home values going forward.

On the surface, things are better.  I am happy Wall Street money came in and injected the markets with some much needed capital, but let's not be deceived by the reality of the situation.  These markets are much more fragile than it appears.  If you are thinking about selling or buying in this market, give me a call so we can sort through your goals and how they fit into the existing markets and, remember, all real estate is local, so your specific market might look completely different than the general markets outlined above.  Call me anytime for a confidential evaluation.  Have a great day!

John Wise