In “IPOs Boost Demand for Silicon Valley Mansions“, Bloomberg attributes the robust housing market in Silicon Valley to the increasing numbers of instant millionaires benefiting from IPOs. The price gains are startling given the second-dip recession that has descended upon so many other neighborhoods across America (for the latest see “US Housing Crisis Is Now Worse Than Great Depression.”)
“The real estate gains in the valley, located primarily in the San Jose metropolitan area, are mostly occurring in towns where million-dollar values are already the norm. The median price in Cupertino gained 12 percent last month from May 2010 to $1.08 million, and values in Saratoga rose 4.7 percent to $1.62 million, according to San Diego-based DataQuick…
…The median price of single-family houses sold in Palo Alto, home of Facebook Inc., climbed 20 percent in May from a year earlier to $1.63 million, the biggest jump since 2008, according to preliminary figures from research company DataQuick. In Mountain View, the base of LinkedIn Corp., prices rose 3.1 percent to $957,500, the ninth year-over-year gain in 12 months.”
In “Homes: Chinese Buyers Make Vancouver Pricier Than NYC“, Bloomberg provides a startling and illuminating account of the dynamics in Vancouver’s over-heated real estate market. The statistics are absolutely astounding. Here is a sample:
“Sales of detached homes, townhouses and condominiums in metropolitan Vancouver jumped 70 percent in February from January, to 3,097 units from 1,819, and were up 25 percent from a year earlier, according to the Real Estate Board of Greater Vancouver. In March, sales climbed 32 percent from February, to just shy of a record for the month of 4,371 transactions set in 2004. Sales increased by 80 percent from two years ago.”
“In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide, according to Canada’s Frontier Centre for Public Policy. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive. Vancouver’s median home price of C$602,000 ($618,000) was 9.5 times the annual median household income of C$63,100, the group said in a study released Jan. 24. Canada had a 4.6 national multiple, making it ‘seriously unaffordable,’ while the U.S. at 3.3 was ‘moderately unaffordable,’ the study showed. To be affordable, the multiple must be 3 or less.”
The rest of the article explains how buyers from China are helping to drive prices in Vancouver as they escape property restrictions back home. Given three waves of Chinese buyers have descended upon Vancouver since 1990, market participants must feel like everything is normal. As an outsider, this market seems to have all the classic markers of a bubble. As long as the money keeps flowing, the market will remain inflated…
In “Housing Rebound in Canada Spurs Talk of a New Bubble” the WSJ paints a familiar picture of what can happen to an asset market when interest rates drop to extremely low levels. Although Canada never experienced a housing crash like that of the U.S., the Bank of Canada still dropped rates to near-zero to help support the domestic economy. Its efforts to support exports (primarily to the U.S.) have been thwarted for much of the past year given the sharp rise in the Canadian dollar.
Here are some highlights from the article that describe the frenetic pace of the current Canadian housing market:
- The average home price rose 23% from the trough in January, 2009, hitting a record according to one broad measure.
- Home-sales volumes are up 70% since January, 2009.
- Housing starts in December reached levels last seen October 2008 (no indication whether these stats were seasonally adjusted).
- “Household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.”
The response of the Bank of Canada speaks to the trap facing policymakers as they contemplate transitioning monetary away from extremely accomodative levels. The WSJ reports:
“…Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: ‘If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.'”
The Canadians avoided the worst of the recent global meltdown. Let’s hope they did not avoid the fire only to land in the frying pan.
A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or more.
“Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels – that’s how you know the bottom is in,” says blogger Barry Ritholtz, who believes home prices are “not even close” to the bottom.
Henry Blodget, who blogs at Business Insider, agrees wholeheartedly: “The recovery’s momentum is slowing … and it seems likely that house prices will now resume their fall and drop another 10%-15%.”
In the wake of this week’s Case-Shiller report, many headlines were similarly gloomy about the prospects for continued home price appreciation:
- “Housing prices rise, but not for long”
- “Home prices up – but for how long?”
- “Housing data points to rocky rebound”
- “House of cards: Home prices may be headed back down”
- “Home Prices’ Ascent Slows”
- “Seasonal Bump in Case Shiller Home Price Index Abates”
- “Case-Shiller Home Price Index Up For 5th time, But Cracks Showing”
This follows Meredith Whitney’s prediction last month that U.S. home prices will fall another 25 percent. “There is no doubt that home prices will go down dramatically from here, it’s just a question of when,” she told CNBC.
Granted, the housing market may correct a bit from here, especially in the winter (traditionally a slow period for home sales), but I think the odds of a major retrenchment in prices are very low.
First, the Case-Shiller index is up five months in a row–a sign of substantial strength.
Second, pending home sales are up eight months in a row–the longest streak since measurement began in 2001.
Third, the inventory of new homes at the current sales rate was 6.7 months in October, the lowest since December 2006. As Mark Perry observes, that’s “just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.” Perry provides the following chart:
Fourth, the number of new housing starts is at a 50-year low. (At least. Records don’t go back further than 1959.)
Fifth, mortgage rates are at a 38-year low. (At least. Records don’t go back further than 1971.)
Sixth, exuberant demand and limited supply in many post-bubble cities are leading to bidding wars, especially (but not exclusively) for low-end properties. In San Diego, prices are up 14 percent in the past eight months. In Las Vegas, where bidding wars are the norm, buyers are “going crazy.” Some California cities, like Bakersfield, report unsold inventory of just two months. San Diego reportedly has just a 1.5-month supply of low-end homes, despite a steady stream of foreclosures.
Housing bears response that demand will dry up once federal tax credits expire. Moreover, they argue that supply will surge once the much-discussed “shadow inventory” of foreclosures hits the market.
But homebuyer tax credits aren’t going to expire until June 30, 2010. That’s seven months from now. And, let’s be honest, if the housing market is showing significant signs of distress, Congress will not allow the tax credit to lapse. Not in the middle of an election year.
And there is little empirical evidence to support the notion that a tidal wave of foreclosures is about to hit. “From the things I’m seeing, there’s not going to be a wave [of foreclosures] any time soon,” says Sean O’Toole, president of ForeclosureRadar. At least one major lender has dramatically reduced the number of foreclosures it is offering for sale. Fannie Mae has launched a program to rent homes back to borrowers rather than foreclose on them.
Yes, there are a lot of foreclosures in the pipeline — no one disputes that — but these homes will probably hit the market in a steady stream over a period of several years rather than all at once. The process of foreclosure is getting slower, due to clogged courts and borrower-friendly judicial rulings. If demand remains as strong as it has been, expect foreclosures to be promptly snapped up by buyers and prices to continue their upward trajectory.
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Prices up 14 percent in the last eight months, according to local research groups. Demand is strongest for homes under $400,000: “With a scant 1.5-month supply [of low-end homes], it’s a seller’s market and many listings are receiving multiple offers.”
The extension and expansion will fuel the already-hot market for low-end homes:
Debbie Miller also was thrilled to hear the news. She has been trying to buy a Modesto home for months, but she keeps getting outbid. “Because of all the competition, it takes a long time to buy. A lot of people are looking and bidding for homes,” said Miller, 59, who works for the Girl Scouts in Modesto. “The tax credit will be extremely helpful in getting me into my own place.”
The only problem: there aren’t enough sellers to “meet demand in a market flooded with prospective buyers.”