US Real Estate - crash coming?

[Spartan_Warrior]

Rates are rising again as of today. Simultaneously, at least in my area, home prices are catching up to pre-2007 levels. Meanwhile, the median income has not changed much, with household income apparently down. The final warning sign was when I was looking at Zillow and they claimed I could afford a house six times my income. Is that what banks are approving nowadays? And how much worse will that get under an administration bent on deregulating?

Is anyone else worried about house affordability going forward? Is this the time to sell before another crash?

[George the original one]

Depends. How is housing demand compared to supply in your area? Are rentals available & affordable? How is unemployment in your area? In the Portland (Oregon) area, the demand is HUGE (like bigger than 2006 timeframe) and unemployment is low, so I foresee no crash in the upcoming year and the market will likely continue to climb. My crystal ball is foggy beyond 2017.

[Gilberto de Piento]

Locally residential is back to unadjusted 2008 prices as of this year. People are going ape. Local economy seems to support it though.

[Spartan_Warrior]

Is there a solid, objective indicator of local demand? My guess is demand is still high relative to supply in my price range, but I'm not sure how best to research it.

My fiance and I are pretty set on selling the current home some time in the next 1-5 years and buying a cheaper rural homestead deal. So I'm thinking about longish-term trends. The Fed is apparently proposing up to four rate hikes next year. But I don't see how home prices can exceed the previous ceiling if incomes haven't changed. It seems like unaffordability will become an issue, at which point (depending on the regulatory environment) people will either no longer qualify for loans>demand falls>prices stagnate, or people will be given loans they can't afford>prices continue to increase unsustainably>mortgages default>new (bigger?) crash.

Admittedly, I don't know what I'm talking about. But it seems truthy...

[Ydobon]

Similar discussions are taking place in the UK. Bits of the property market are probably in bubble territory (London), others are merely perennially popular (Edinburgh (financial hub), posh bits of Glasgow (sub-Edinburgh prices, but very hipster-y)). Others (NE of the country etc.) remain positively underwhelming.

I can't get too worked up by prices that have caught up with where they were 9-10 years ago, hardly strikes me as excessively exuberant.

The UK does have a lot of micro areas that have gone a bit nuts, but the overall trend probably isn't too crazy considering how bad we are at building enough houses.

As someone who bought an expensive for us house with a big mortgage relative to income, I'm more than happy to see some HPI, as it reduces the amount I need to pay from my own pocket once we FI/RE and buy somewhere more suitable for our life circumstances at the time. We're at +9.5% for the year. Even if you assume that's overly optimstic and discount 50%, that'll do nicely

[George the original one]

> I can't get too worked up by prices that have caught up with where they were 9-10 years ago, hardly strikes me as excessively exuberant.

Exactly. Relative to that period, we're still well behind the market hype of those times. Interest rates are lower than then, too.


> But I don't see how home prices can exceed the previous ceiling if incomes haven't changed.

Starter homes will have higher demand than midrange homes & upper-end homes when there is a mismatch between income and home prices. It's not so much how expensive the homes are if people feel their continued employment prospects are good. They will find a way to make it work.

Also, don't think so much in terms of average income since the people in the bottom third of incomes never will be able to afford homes because they typically aren't interested in saving for the down payment. Middle income households and higher have more flexibility. Another way to look at it: you were likely above average income when you bought your house, so why are you looking at average incomes?

[oldbeyond]

Basically, the debt problems of 2008 have only gotten worse. At the moment, rates are rising. I think the dynamics you describe are likely to be good descriptions of the near future. Still, timing is everything. I live in a country that avoided a housing crash in 2008, meaning that our private debt/capita is giving Japan a run for its money, and my line of thinking is managing downside risk, as renting is only viable for certain forms of housing around here "forcing" us to buy. Here they are talking about limiting borrowing to 6x income, which apparently would kill the market and our economy overnight, if the pundits are to be believed. It can always get a little more crazy.

[Toska2]

I am in a place where there are apartments or expensive homes* being built. Therefore prices are going up up up but rents are more modest. That's how I explain the dichotomy.

*About 5x in a touristy town. Think gaudy fronts, granite and small plots.

[Farm_or]

Nonetheless, it's a good point that you bring up, and it is worrisome. The 2008 collapse was due to too many defaults. Bad loans for any other reason will still end in a collapse. Another related measure is the amount of people defaulting on auto loans. Not such a big deal, because the creditor repos and recoups the loss, but it could be an early indicator of a growing problem?

[Riggerjack]

The real estate metric used is housing supply. Divide total houses for sale by rate of sale. Expressed in time. 6 months is considered neutral. 6 weeks is very hot, 1 year is very slow. Google "housing supply (your area)".

For actual mortgage rate information, go to mortgage news daily. In particular, there is a blog there called MBS rate watch, or something similar. It will be a daily blog about the mortgage secondary market. It is interesting to see what gets prices into the market, but be aware that those factors are about as accurate as watching Bloomberg and seeing what is supposed to be influencing the stock market.

This weekend, we will be deciding whether to sell my original house, or rent it out again. I'm leaning towards sell, with a hold on the proceeds, waiting for an opportunity to buy a solid deal in RE, after rates go up, recession hits, or whatever.

[Gilberto de Piento]

Housing market reports from the federal government that contain the housing supply metric:

https://www.huduser.gov/portal/ushmc/chma_archive.html

These visualizations about housing are also interesting. See South Dakota:

http://lenkiefer.com/2016/05/22/populat ... use-prices

[George the original one]

Wow, the huduser detailed reports are excellent!