The Evidence is Pointing to a Second Housing Bubble in our Future

For the last several years, the mainstream media has constantly talked about housing recovery. They love to point to areas such as Austin, Texas and Seattle, Washington as being proof that things are looking up and will be able to stay up for years to come. However, looking at the hard data and what’s really going on makes it clear that not only is housing not doing well, we’re potentially headed for a second real estate bubble.  While many pundits may disagree, the evidence is out there and we’re going to prove it to you today.  Let’s take a look:

Overvalued Real Estate

The cause of the last housing bubble was partly due to so much of the real estate market being overvalued. Today things are even worse, as its estimated that real estate is now 25 to 60 percent overvalued in many areas. The value of real estate is more than people are able to afford, and that’s a big problem. For instance, in the Bay Area the average income is $180,000 per year, while the average home price is $1.45 million — and these are normal residential homes, not properties that people are buying for speculation. Using the industry’s preferred debt to income ratios, someone making $180,000 per year shouldn’t get a house that costs more than $778,000 to ensure he can pay his mortgage and still be able to afford all of his other debts and living expenses. With homes topping well over $1 million, people are either put into the position of buying homes they can’t afford or simply not buying at all because they don’t have the money and don’t qualify for a loan.

Home Buying Is Down

Despite companies like Quicken creating products such as the Rocket Mortgage and Guaranteed Mortgage throwing celebrities in their ads to appeal to potential buyers, few Americans are actually able to buy any real estate and it’s still not that easy to get a house loan. Even qualified buyers with enough income, savings for a down payment, and a good credit score are finding it quite difficult to get into the real estate market in many areas, especially those that are now trendy.

The number of mortgages given out over the last several years has remained flat, and today less mortgages are obtained than in 2012, which is the year the industry claimed the housing market’s recovery began. If the market is supposed to be so healthy now, why is it that less people are buying homes? It’s not because they already own one, as the rate of home ownership in the US has steadily fallen and is reaching a low point.

The days of anyone being able to go get a home loan whether they could afford it or not are gone. That’s definitely a good thing, but what’s not so good is that housing prices are still rising even though less and less people can afford it. It’s clear that irresponsible lending to first time homebuyers isn’t causing the next housing bubble since most people aren’t buying, so what is the problem?

Causes of the Bubble

One of the culprits is a decreased supply of new construction single family homes, combined with a lack of older homes on the market that people can afford to buy. If you happen to come across a cute little house that you can actually pay off in a decade or so, good luck getting that property if you’re not a cash buyer. Those who have the advantage of paying all cash are not only snatching up such homes, they’re renting them out at high prices.

Overvalued property and prices that are propped up by so-called unorthodox capital are another issue. There is still a significant number of foreign investors who have swooped in with cash to buy homes here in the US, either to stow their assets or rent out for profit. However, even more domestic investors have added to the bubble by taking out mortgages for second and third homes that they then rent out. These are distressed fixer uppers and lower priced houses that would be affordable to the average American, if only they weren’t outbid by buyers with deeper pockets and those who can pay cash. Once the homes are bought by the investors, they’re rented out at high prices. Many renters only make enough to pay their landlords and provide basic necessities, they can’t also afford to save enough to eventually buy their own houses.

The Breaking Point

With all of the unconventional capital propping up the real estate market, it will just take a small push to pop the bubble. Institutional investors who aren’t getting their expected returns are already beginning to exit the market, and as this trend continues home prices will keep tumbling. As it is, housing prices are coming down, even in hot real estate areas. It’s also becoming much harder to sell a home. Look on any real estate listing site such as Zillow or Trulia and you’ll see homes sitting on the market for 30, 60, 90, or even more than 120 days. As the houses sit, prices keep coming down in the hopes of attracting a buyer, or the properties are taken back off the market by their owners who either rent out the properties to stay afloat or stick with them for the time being.

So, what about the markets that have experienced housing price growth? Those are the exception, not the rule. And even pockets of those cities, such as New York, Austin, Denver, and Portland, are experiencing price drops and lower sales. The rise in prices nationwide is not due to increased demand and more people buying homes, but the fact that there’s less construction, more foreign and domestic cash investors, and artificially low interest rates.

As for those landlords who have bought up cheap properties, even they’re finding that there’s a limit to the scheme. As families combine households to decrease their expenses and move further from large cities to cheaper areas, opting to commute longer distances to work, renting out properties in some locations isn’t as easy as it used to be.

The answer to the question of whether we’re headed for another housing bubble is a very more than likely “yes”. This time, however, it won’t be so easy to pull off the illusion of a recovery or actually right the ship.