Real estate broker Vince Landolna has a theory about the housing bubble debate: Due to high housing costs, San Francisco Bay Area home buyers are seeking out affordable housing elsewhere. They’re turning their attention east towards California’s Central Valley.
Now, these lower-cost areas are inflating wildly, pricing out local residents.
The escalated housing values won’t be a problem as long as homeowners are making enough money to afford the increasing mortgage payments. But if increases in household income can’t keep pace with escalating housing values, then watch out for the real estate bubble and the resulting foreclosures.
Landolna’s prognosis came from a recent Inman News opinion survey that asked readers their opinion on the housing bubble debate. Despite recent stories in which real estate professionals were still upbeat about the market and unconcerned about rising interest rates, the survey results showed people definitely are worried.
Real estate professionals fear the mounting disparity between growth in household income and the rapid pace of home appreciation rates is unsustainable. They worry rising interest rates will cause the bubble to burst sooner rather than later. They fear some buyers have overleveraged themselves, stretched their qualifications and taken out short-term teaser adjustable-rate mortgages.
“To say there is no bubble is to make the absurd claim that real estate is really twice as valuable today as it was 19 years ago, even though nothing else in our economy has grown proportionately,” one person wrote.
And yet, many observers across the country have contended there is no such real estate bubble. Experts disagree on whether a bubble even exists, the media have run endless stories on the topic and a few markets around the country show signs of cooling. The consensus seems to be that there’s no clear-cut answer. But it’s definitely a concern.
In Solano County, Calif., the market has gone from hot to cold. One survey respondent watched for months as houses were sold in days, if not hours. Now, a house listed three weeks ago has brought about little activity and no offers. When the house was listed, there were four other homes for sale in the area and price range. Now, there are more than 20.
Housing in Boston appears to be in trouble as well. The bottom line there is that housing is not affordable. The average salary can afford only half of the average house. People have forgotten the downturn just 10 years ago, insisting the market will never go down, wrote one person.
“That’s exactly what people were saying about Internet companies before their downfall,” the person continued. “People love to forget the past for future optimism.”
South Florida will see rising interest rates translate to falling prices and rising foreclosures and bankruptcies. The huge gap between astronomic appreciation rates over the past four years and average household income gains will cause the bubble to burst in many local markets and segments within those, wrote Jack McCabe, CEO of McCabe Research & Consulting.
And some say Southern California may be in for a shock as well.
Homes are on the market now with unprecedented price tags, such as 40 percent higher than just three months ago. Home buyers aren’t visiting open houses now. Home listings inventory has tripled since the beginning of April. Combine those factors with rising interest rates and the bubble rupture could be “massive,” according to one respondent.
Those views are right in line with other observations of the Southern California housing market. Real estate experts in the area have said price increases are slowing down and for-sale properties are spending more time on the market.
But if interest rates stay low, the economy stays strong and lenders continue to come up with different financing options, the market will stay hot overall.
“However, if one or more of these factors sour, and it will take only one, well that thud sound you hear will be the latest real estate rocket coming to an abrupt halt,” wrote Brian Hemenway.
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