By Dave Parrish
We are indeed in a housing recovery, one that began in October/November 2011.
Regular readers of this column have heard me speak about this long-awaited recovery for sometime. It has taken well over a year of that recovery to be reflected in a convincing, statistical way. I’ve been speaking some time now, as well, about a shortage of inventory, rising rents and pent-up demand for housing. As these improvements in the market forces have occurred, prices have begun to rise again rather than fall. Good news.
Yes, housing prices are rising and that makes for headlines and concerns by some that we may be looking at another “housing bubble.” The question in many minds must be: Is this just another sensationalistic attempt to attract attention or is there in fact a real danger of a new housing bubble?
I remember well the 10 percent appreciation rates we expected and in fact experienced during the 1970s, driven largely by we baby-boomers looking to buy our first homes. Never heard anyone call that a bubble. During the early 2000s, we again saw a dramatic surge in housing prices in an almost totally deregulated market in which the financial industry acted as dealer and player. Again, appreciation rates were in the 10 percent per year stratosphere, the average rate. There were markets in which the appreciation rates exceeded 20 percent per year, most notably California, Arizona, Nevada and Florida.
The projected annual appreciation rate in the 4 percent neighborhood is a return to normal appreciation rates. Will there be some fluctuation in these rates? Surely there will be some modest fluctuations. We may even have brief periods of hyper price increases in certain sectors as supply and demand come into balance again. We are seeing this right now in the Birmingham market with new home prices.
With subsidence of market fear paired with pent-up demand for housing, actual demand has returned to normal levels. With an increased demand for housing and little desire to tackle the “fixer-upper” projects associated with foreclosures and abandoned properties, many have decided a new home is the best way to realize the lifestyle they desire. New home construction has seen dramatic increases, but nowhere near the boom level. New home inventories have not been enough to satisfy the resurgent demand, so we have seen some dramatic price increases there, due in part to the supply vs. demand issue, but also to a large increase in construction material costs.
This is not bad news for existing home sales. They will follow this wave of the new housing market and price increases, but not at the same levels of appreciation levels currently being experienced by new home prices. Neither will new home prices continue to rise at the same level that we are currently experiencing. Why? Because success is a strong attractant. There will be more competition in the new home sales arena with more builders returning to the marketplace. The governor for that new competition will be the buildable lot inventory, so look for developers to start clearing ground for new subdivisions.
Is there anything that prevents us experiencing a new housing bubble? The new appraisal standards and regulations set in 2009 are examples of regulation put in place to thwart uncontrolled and unsupported appreciation rates that lead to unfounded bubbles.
As to the fear of a new housing bubble, for the foreseeable future an annual appreciation rate of 4 percent to 4.5 percent should be expected for desirable markets.
Looking back at the past, it would seem that we may remember these lessons for 20 or 30 years, then amnesia or the belief that “this time will be different” seems to set in and we have to learn all over again.
That brings me to a pair of questions: What causes a bubble in any market? Over exuberance. What causes a bust? Fear.
We all have a role to play in preventing bubbles and busts. Fight over exuberance. Beware of greed, even when it is our own. Beware of fear — it rarely leads to the best decision-making. I believe when others are selling, it’s time to buy. When they are buying, it’s time to sell.
May the market be with you.