A Real-Estate Bubble: Fact or Fiction?

By Eddie Speed, Editor, REal Income Alert

Everybody keeps asking me if I think we’re back in a real-estate bubble.

I read a quote from Robert Shiller recently. He said: “Bubbles are created when investors don’t recognize when rising asset prices get detached from underlying fundamentals.”

Now I don’t have an Ivy League degree, but I’m up to my antlers in the real-estate market every single day. I’m not sounding the alarm yet, but we’re definitely heading into bubble territory here.

Think about it…

Which of the following statements are fact or fiction?

1. Banks are artificially inflating home prices.

Fact!

Take a quick look at this recent non-performing loan data from the top 10 banks:

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Those numbers are in the billions! And the Big Three are at double the rate of all other banks. Yet they’re slowing the release of their real-estate owned (REO) inventory back into the market to keep supply tight… to stop prices from falling.

How about this one…

2. First-time homebuyers have started buying homes again.

Fiction!

First-time homebuyer numbers are down. It’s the large speculators like Blackstone and American Homes 4 Rent that have really driven the increase in property values. Yes, it has stopped the free-fall of home prices, but I think it’s a temporary fix.

Here’s one more…

3. The government-sponsored loan modification programs have been successful.

Fiction!

Yes, we’ve seen 28 consecutive quarters of year-over-year inventory decreases. And yes, there’s just a five-month supply of new homes on the market, according to the National Association of Realtors (NAR).

But this is because cash investors, large private equity firms and hedge funds have been swooping into the single-family home rental market, scooping up properties left and right.

And all of this activity is only artificially inflating home prices. While those price increases (although baseless) have erased negative equity for millions of Americans, the reality is that 9.7 million residential properties with mortgages (nearly 20% of the total) still have negative equity. That’s an all-time high.

So what’s going to happen when the banks and hedge funds start dumping their rental properties, as we know they will? It’s basic supply and demand, folks.

We can expect to see property values fall again in the very near future.

The sad and simple truth is that we won’t have a true real-estate recovery until first-time homebuyers enter the market in large numbers and new home construction moves higher.

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Categories: Housing Market

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