Is this another real estate bubble or just a lot of hot air?

The number one question Redfin’s real estate agents are being asked these days is: “Is this another bubble?”

For now, the answer is no. Overall, the housing market this spring is hot, way hotter than any normal spring. For the most part, this is just the natural result of supply that is at record lows thanks to the price declines of the last few years.

The Great Bubble Spring 2013
High price to income (PI) ratios Low to average PI ratios
Lots of new listings Record low new listings
Record high sales volume Average sales volume
Extremely easy credit Relatively tight credit

A Mini Bubble Brewing in a Few Cities

The market today is so hot that many Redfin Agents are concerned that we’re entering into bubble territory. At a recent lunch with a half-dozen Redfin Agents, Redfin CEO Glenn Kelman asked whether they felt that the market was getting bubbly. They all nodded vigorously.

In some markets, there may be a “Mini Bubble” going on right now. This map shows the four markets most likely to be in a Mini Bubble, and the four least likely:

New-Bubble-Map3_Redfin

Market Price to Income
vs. Jan-00
Sale to List
Mar-13
Flips*
Mar-13
Multiple Offers
Mar-13
2-Week Pending
Mar-13
Washington DC 26% 98% 11% 71% 43%
Los Angeles 26% 100% 10% 91% 52%
San Diego 13% 99% 11% 91% 50%
San Francisco 12% 104% 10% 93% 60%
New York 9% 94% 6% 68% 9%
Portland 8% 99% 8% 60% 41%
Boston 6% 97% 11% 74% 3%
Seattle 4% 100% 12% 74% 48%
Denver 0% 100% 12% 46% 52%
Phoenix -4% 99% 10% 36% 37%
Charlotte -8% 97% 3% 50% -
Dallas -10% 98% 7% 46% 28%
Las Vegas -14% 101% 10% - 14%
Chicago -17% 97% 7% 51% 12%
Atlanta -20% 99% 18% 50% 24%
National 5% 99% 10% 76% 35%

* “Flips” refers to the percentage of home sales where the same home also sold at least once more in the preceding 18 months.

The Most and Least “Bubbly” Cities

Washington DC

#1 Most Bubbly: Washington DC

Prices 26% above historic norm — "We are definitely in the beginning phases of a bubble" - Redfin Agent Philip Gvinter (photo credit)

Los Angeles, CA

#2 Most Bubbly: Los Angeles, CA

Prices 26% above historic norm — "In LA there is super low inventory and huge buyer demand... we're in a frenzy." - Redfin Agent Eric Tan (photo credit)

San Diego, CA

#3 Most Bubbly: San Diego, CA

Prices 13% above historic norm — "People can also purchase more home than they may need, or originally even wanted, because of the combination of low prices and low rates." - Redfin Agent Anna Nevares (photo credit)

San Francisco, CA

#4 Most Bubbly: San Francisco, CA

Prices 12% above historic norm — "Some properties are receiving in upward of 40 to 60 offers and selling in 24 hours or less." - Redfin Agent Charmaine Frank (photo credit)

Atlanta, GA

#1 Least Bubbly: Atlanta, GA

Prices 20% below historic norm — "There are a lot of buyers that want to get in on the 'bottom,' but we just don't have the inventory to support this demand at this time." - Redfin Agent James Marks (photo credit)

Chicago, IL

#2 Least Bubbly: Chicago, IL

Prices 17% below historic norm — "We have a chicken and egg problem in Chicago, as many would-be sellers are not placing their homes on the market because there are no move-up homes available." - Redfin Agent Greg Whelan (photo credit)

Las Vegas, NV

#3 Least Bubbly: Las Vegas, NV

Prices 14% below historic norm — "Despite the quick and seemingly drastic home price increases we're seeing this year, we're most-likely just experiencing an adjustment to that over-correction during the crash." - Redfin Partner Agent Azim Jessa (photo credit)

Dallas, TX

#4 Least Bubbly: Dallas, TX

Prices 10% below historic norm — "Some of the hotter neighborhoods are starting to see price hikes and demand that's unsustainable, but Dallas isn't in a bubble." - Redfin Agent Jason Aleem (photo credit)

Washington DCLos Angeles, CASan Diego, CASan Francisco, CAAtlanta, GAChicago, ILLas Vegas, NVDallas, TX

What makes a Bubble?

Multiple offers are becoming the norm in many markets. More than a third of new listings are pending within a week, over half in much of California. Inventory hits a new record low every month. There’s no doubt that this market feels similar in many ways to the bubble of 2005 and 2006, but a real estate bubble is more than stiff competition among buyers and rapidly rising prices.

Consider some of the features of the real estate bubble that dramatically burst in 2008, taking the entire economy with it. The Great Housing Bubble had the following characteristics…

Rapidly Rising Home Prices

All 20 markets tracked by the Case-Shiller home price index experienced year-over-year price gains from 2003 all the way through early 2006. Now, home prices are definitely rising rapidly in many markets. Of the 19 markets we track as part of the Redfin Real-Time Home Price Tracker, 12 saw double-digit price gains between March 2012 and March 2013. Sale-to-list ratios are 98% or higher in over two thirds of Redfin’s markets and up from a year ago in every market but Phoenix:

New-Bubble_Sale-to-List_2013-03_Redfin

But a spike in home prices alone does not a bubble make. Over the long term home prices have historically risen slightly faster than the rate of inflation. The recent spike in prices is just a return to the long-term trend in many markets that overcorrected, which leads us to…

Home Prices Detached From Incomes

One of the easiest ways to tell if you’re in a housing bubble is to compare home prices to incomes. If home prices are rising considerably faster than incomes, chances are good that there’s a bubble. Over the long term, price to income ratios should remain relatively stable in any given market, barring dramatic improvements or collapses in the local economy.

To investigate where this metric sits today, we compared the Case-Shiller home price index to per capita incomes from the U.S. Bureau of Economic Analysis. Between January 2000 and the height of the housing bubble between 2005 and 2006, the price to income ratio rose over 50 percent in half of the twenty metro areas tracked by Case-Shiller. Across the nation as a whole, home prices rose 102% between January 2000 and December 2005, while incomes rose just 24%.

Today, in 11 of the 20 markets, price to income ratios are at or below where they were in 2000. Just four markets are in possible “bubble” territory, 10% or more above their January 2000 level: Washington DC (+26%), Los Angeles (+26%), San Diego (+13%), and San Francisco (+12%).

Change in home price to per-capita income ratio since Jan. 2000

Case-Shiller Metro Area Peak Latest
Atlanta 12% (20%)
Boston 51% 6%
Charlotte 23% (8%)
Chicago 34% (17%)
Cleveland 8% (26%)
Dallas 10% (10%)
Denver 16% 0%
Detroit 11% (35%)
Las Vegas 83% (14%)
Los Angeles 103% 26%
Miami 106% 10%
Minneapolis 42% (7%)
New York 69% 9%
Phoenix 72% (4%)
Portland 49% 8%
San Diego 93% 13%
San Francisco 79% 12%
Seattle 45% 4%
Tampa 86% (3%)
Washington DC 92% 26%
Composite-20 63% 5%

Lots of Listings and Sales

When home prices were shooting to new highs in 2005, sales and listings were off the charts. Inventory was low, but not for lack of new listings. Plenty of new homes were coming on the market daily—new and existing home sales hit levels in 2005 that were more than double their early 1990s levels—but record sales were keeping standing inventory low.

Contrast that with today’s market, where new listings are scarce and standing inventory is at record lows. Sales are up quite a bit from their post-bubble lows, but current levels are roughly on par with pre-bubble averages. To put it another way, during the frenzy in 2005, inventory felt tight because many buyers were acting crazy, but today inventory is actually tight. Tight inventory naturally leads to price increases.

Proliferation of Sketchy Financing

At the height of the market frenzy in 2006, abundant financing was available to anyone who could fog a mirror. No job, no income, no assets? No problem! Over a quarter of homes were purchased with zero-down loans. Many of those homes ended up as the foreclosures and short sales that caused much of the post-bubble pain the housing market has experienced the last few years. Meanwhile, all-cash deals were relatively rare, making up about 17% of sales.

New-Bubble_Sale-Financing_Redfin

Today the tables are completely turned. Just six percent of sales are backed by zero-down loans, while nearly half of sales (46%) are all-cash. Much of the frenzy we’re experiencing today is driven by investors. That doesn’t necessarily mean that prices are reasonable, but it does mean that we won’t be seeing the same kind of crash we had in 2008.

So What Will the Next Bust Look Like?

In our most recent buyer survey 58% of buyers—62% in Washington DC and Los Angeles—indicated “low interest rates” as one of the primary reasons they’re buying now. The Mortgage Bankers Association forecasts that the interest rate on a 30-year fixed-rate mortgage—currently at 3.57%—will rise nearly a full point to 4.5% by this time next year. That’s still low by historic standards but could easily be enough to significantly dampen buyer enthusiasm.

At the same time, the recent upticks in prices will bring more sellers into the market over the next year, and homebuilders are still ramping back up, with new home sales likely to increase quite a bit from their current level.

In other words, over the next year inventory will increase and demand will decrease. In markets where home prices are at or below a level supported by local incomes, this will just slow down appreciation, but in Washington DC and Los Angeles this could trigger a minor correction, knocking around five percent off home prices in those markets.

In Washington DC, where the home price to income ratio is 26% above the January 2000 level, Redfin Agent Philip Gvinter recently wrote an offer with no appraisal contingency, no inspection contingency, accepting the home in as-is condition, a 14 day financing contingency, and a $40,000 escalation clause, but still came in second out of thirteen offers. “We are definitely in the beginning phases of a bubble,” remarked Gvinter.

San Diego is also a risk, but to a much lesser degree, since prices there haven’t shot up as much yet. In San Francisco, well over a third of the sales are all-cash, but the home price to income ratio is 12% above the January 2000 level, and rising. Redfin Agent Charmaine Frank describes the market there as “a complete frenzy,” and observes that “some properties are receiving upward of 40 to 60 offers and selling in 24 hours or less.” This in a market where the median home price in March was over $800,000. However, since income data does not include capital gains such as stock sales, which are a big driving force in the Bay Area right now, it’s unlikely that there will be a correction there unless tech stocks crash first.

What’s a Buyer or Seller to Do?

If you’re buying a home in Washington DC or Los Angeles right now, be cautious. If you find a home that you can’t live without and you can get it for a price that you are 100% comfortable with, go for it, but it’s not worth over-extending or compromising in this market when lower prices, higher selection, and less competition may be just around the corner.

If you’re buying in the middling markets, there’s no need to be concerned about near-term price declines, but it also won’t hurt to wait it out for a year or so for the frenzy to die down. Prices aren’t likely to be much higher. If you’re a price-sensitive buyer in Atlanta, Chicago, Las Vegas, or Dallas, buying soon would be a good idea, since prices are likely to go up before they stabilize at historically supported levels.

If you’re thinking of selling your home to sell in Washington DC or Los Angeles, you would do well to get it on the market now. Take full advantage of the current frenzy, rent a while, then look to buy in a year or so when inventory will probably be higher. If you play your cards right you’ll get a nice down payment out of your current home, so higher rates won’t affect you as much when you buy later.

Don’t Call it a Comeback (of the Bubble)

The dearth of listings and price gains we’re seeing in today’s market are not sustainable, but the evidence points to more of a “bottom bounce” than a bubble. Things will settle down, the imbalance between buyers and sellers will inevitably tilt back to equilibrium, but barring a massive external economic disruption or major world war, prices are unlikely to drop considerably from where they are today.

Discussion

  • http://twitter.com/financialsamura Financial Samurai

    What’s the term real estate agents use? “Buy now or be priced out forever?”

  • HomePriceTrader

    In addition to spot prices, the current “enthusiasm” is priced into forward CME Case Shiller futures. LA, San Diego and San Fran markets are bid +18.2%, 20.7% and 25.6% for Nov 2017 contracts.

  • http://www.facebook.com/pwillard Paul Willard

    I think you nailed San Francisco Tim. If capital gains were accounted for, I don’t think this would look unusual. But if capital gainers dwindle because the ipo market turns, would there be an adjustment because the demand curve moves substantially, or would everything just pause and wait as supply waited for buyers to return?

    This also raises a question for me which you might know the answer to. Are there cities like San Francisco where the income growth of home buyers is significantly different than the income growth per capita? If we looked at buyer income rather than per capita, would the San Francisco numbers fall closer to in-line?

  • danielkim44

    Sacramento region will definitely face a BIG BUBBLE before the end of year becos; too many investors have been fooled by realtors that theycan make a bundle. Co’s like Lyons have been in cahoot with “research firms” playing up the numbers so that you will find now that over-optimistic listings have failed miserably like a recent listing by a Julia C. of Lyons for a Mira del Rio property was brought down to earth from a high$249k to two other properties in neighborhood including one next to her’s at $110K, LOL…

  • TheNoob

    In most places, primarily in L.A. county, expect the prices to keep going up then a bust will happen. Once people (real home buyers) realize they are feeding into a bubble waiting to be burst, these people will suffer the most. Currently the bulk of the buyers are being taken by the home flippers. They are speculators from local and abroad. They have purchased many with cash and will try to spend a little to remodel the place and sell it for 25-50% more than what they’ve paid. If the “real home buyers” stops buying, these flippers will start realizing a negative returns on their speculative gamble and you may see a huge crash of the housing market. It may be uglier than what happened in 2008. Just wait and watch. If you own a home, consider selling and sit in the sidelines waiting for blood on the streets. If you don’t own one, be careful when buying a house. Of course real estate companies are going to say it’s not a bubble. If you ain’t buying, they ain’t getting paid.

  • John Doe

    We in SF area suburbs like Pleasanton saw a minor correct, few home got reduced. Also hearing from Redfin agents that over million buyers are putting their hands up and saying enough is enough. Bubble or correction – this market is not sustainable, prices are going to come down and when they got up this fast they also drop hard. Don’t make an emotional purchase, we bought a house in last bubble due to panic.

  • Bamboclot44

    So, what you’re saying is that Los Angeles is 26% above the historic price to income ratio but it will only correct 5%? That does not make any sense at all by your own statistics. If we are to revert to the historic mean then prices should be falling 26%. If you look at prior bubbles and busts things usually tend to over correct, a bust of 30% or more (a mega bust) would not be out of the question since in my opinion the last bubble never fully deflated to begin with and in addition unemployment is stubbornly high and there are considerable economic headwinds ahead, especially when the phases of quantitative easing that is keeping this economy on life support comes to a close.

    • jwinston2

      regarding QE, the question is will the FEDs actually stop? I am not sure they will.

      • Bamboclot44

        well, it does seem that the FED wants to pursue QE-Infinity but I do not think that is going to be an option due to inflation in everything but wages. Cheap money also creates huge moral hazards and just causes the bubble to become even bigger. It’s already caused mania and speculation which when it stops has the risk of a huge crash. What we want is growth in JOBS and wages, not growth in real estate fueled by speculation.

  • Joe the engineer

    Typical Google, Apple, or Facebook engineer gets a couple million from the stock option (if they got in early) plus couple hundred thousand from parents in China, so of course a lot of sales are all cash.

  • E. Hall

    “For the most part, this is just the natural result of supply that is at record lows thanks to the price declines of the last few years.” Totally a biased statement that is BS. The real reason is the central banks are holding on to tens of thousands of foreclosed homes in local markets across the country than are currently on the market. Has nothing to do with price declines. Do your research and you will see the real estate market is at it again with their hat trick and pony show scam. Home ownership in the U.S. is at a 17 year low. Stop telling lies to potential buyers. Disgusting to see this happening again.

  • CM expat

    Umm…I call BS. This is a investor driven market now. Large, medium and small investors are buying up foreclosures, and anything that comes on the market, with the sole hope of driving prices up, and flipping the house in a matter of months or renting it out – still having the same effect on home prices. So just like the stock market, it’s driven by speculation instead of solid economic growth in the area, employment etc. I personally would like to see a tax on investment properties of 50-60% if the person sells the home within 1 year. And I hope that all the greedy investors out there are stuck holding overvalued property yet again. They never seem to learn.

  • http://savehouses.org/ Gerald Harris

    If there are people entering into the Buying market I would tell them to purchase with caution. Just because you qualify for 300k does not mean your can afford it. Be smart, if you make 6k a month spend no more than 2k on your monthly payment. Maybe that means you look for a house going for 225k range to 250k range. Use common sense and try to take the emotion out of it. No more adjustable financing. Keep it fixed. Find financing with someone you trust, no someone who is simply out to get you.

  • g35suck

    Bs. Of course its a bubble. I’ve seen crappy homes in my city going for 600k. A simple look on zillow and we see the house was bought for 250k just 2 months ago.

    Guess what, the listing is still available. No one stupid enought to pay 600k for an asbestos contaminated home built in the 50s.

    I am looking to buy my first home in california. Just waiting for the bubble to burst.

    And yes its a bubble. Half the homes in the listing are forclosed, bank seized homes that haven’t been sold for 3 months.

    The price is just ridiculous. No home should be more than 350k. Especially at the condition they are in.

    You can buy a brand new mansion in tx for that amount. Seroiusly, the prices are way overinfated.

    There is no demand. Those homes are just collecting dust.

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