Talk of another housing bubble is spreading as prices and rates rise and inventory plummets.
However, Pro Teck Valuation Services’ July Home Value Forecast Update takes a look at how bubbles are created and why the current market indicators are not, in fact, pointing to another housing bubble.
"The rapid recovery in home prices in a number of U.S. metros already had some observers to suggest that we are in another home price bubble," said Tom O'Grady, CEO of Pro Teck and Michael Sklarz, principal of Collateral Analytics. "Our feeling is that while price increases have been sharp, they should be viewed as corrections to the overshooting of prices on the downside in the 2009-2011 period and not the beginning of new home price bubbles."
The authors of the forecast note that they have been writing about bubbles for more than 10 years and that they’ve seen a common theme used to describe bubbles in other markets — such as the stock market in 1929, gold prices in 1979-80 and the Japanese real estate market in 1989-90. In each of these markets, prices jumped to levels that couldn’t be justified by underlying fundamentals.
In the late stages of a bubble, the authors noted, prices keep rising primarily because they are expected to keep rising.
"Our finding was that a simple measure of how much the market has increased over a five-year period has proven to be an excellent indicator of most bubbles," added O'Grady and Sklarz. "In the case of the U.S. stock market over the past 100 years, we found that whenever the 5-year rate of change of the S&P 500 Index has exceeded 200%, a significant market top has occurred followed by overall stock market crashes."
Studying price changes over a 5-year time frame is sufficiently enough time to filter out shorter-term trends, the authors wrote.
The July forecast also includes a listing of the top-10 best and worst performing metros as ranked by its market-condition ranking model.
"All of the top 10 markets this month are exhibiting positive trends in all of the market indicators we follow," added Sklarz. "Two new entrants to the list are Cambridge, MA and Providence, RI from New England, which is interesting because the Northeast had been lagging the nationwide real estate recovery. Other markets included in the top are in Texas and in North Carolina."
"Once again, the bottom ranked metros also represent an interesting mix around the U.S. While all have higher single or double-digit Months of Remaining Inventory, many of the indicators are showing positive trends, including increasing sold prices over the past year," added Sklarz.
