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Real Estate Big Data

Housing market: Is it a bubble, or not?

(REAL ESTATE BIG DATA) There’s a lot of talk about whether or not the current housing market is a bubble. Let’s unpack both sides of the debate.

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Woman and man discussing the housing market earnestly, while holding a notebook

The housing market is crazy right now, with some attributing soaring prices to business as usual and others warning that those same prices are indicative of a bubble—one that, some fear, is close to bursting and triggering another recession. Whether you’re looking to buy or you’re simply window-shopping, here are some valid arguments for both sides of the issue.

A common argument for the existence of a housing bubble includes the issue of rising housing costs, with experts pointing to a strong upward trend in house prices as proof of an invariable crisis. On paper, this is an argument that makes sense since it mirrors the events leading up to the crash of 2006.

However, the reason the market crashed in 2006 has less to do with high prices and more to do with an abundance in risky loans and high interest rates—two things that don’t exist in today’s market. Adjustable rates are also virtually nonexistent for mortgages issued in 2021 (according to Bloomberg, only 0.1% of those mortgages allowed for interest adjustments) while around 60% of mortgages awarded in 2006 carried adjustable interest.

Bloomberg also points out that, between the aforementioned price hikes and common demand, most homeowners are situated to sell at a profit these days. This helps prevent the foreclosure issues evident in the crash of 2006.

Combine a high demand for homes and a relatively short supply of them (in comparison to decades past), and the market seems pretty tight for now—certainly not attributes one would expect leading up to a housing crisis.

But that isn’t to say that there isn’t cause for concern; there are a few reasons why the current housing environment could collapse.

Firstly, while it isn’t fair to compare current prices to their 2006 counterparts, it is fair to point out that the market will eventually hit a ceiling—something that often precedes a crash. Markets fluctuate all the time, but real estate tends to do so more slowly and over longer periods of time—and the market has been rising for long enough that a crash seems inevitable. It isn’t entirely out of the realm of feasibility to be worried about that.

Banks are also starting to invest in cryptocurrency, and, as the primary financiers of real estate endeavors, that could bode really poorly for people looking to get loans should the (very real) cryptocurrency bubble burst. Banks like Goldman Sachs have hired crypto investment specialists to avoid such a catastrophe, but the fact remains that cryptocurrency is still a wildcard—and, in a market that craves stability, that’s a problem.

On a different note, Finimize pointed out that JPMorgan reported an anticipatory drop in earnings from trading during the current quarter, which could also be an ill omen: If trading is slowing down, it could preempt another crash.

Frankly, this could go either way and nobody would be terribly surprised. While it does seem like the market is stable enough to prevent a catastrophe of 2006 proportions, you won’t catch anyone making fun of you for preparing for a drop in the near future.

Jack Lloyd has a BA in Creative Writing from Forest Grove's Pacific University; he spends his writing days using his degree to pursue semicolons, freelance writing and editing, oxford commas, and enough coffee to kill a bear. His infatuation with rain is matched only by his dry sense of humor.

Real Estate Big Data

Supply crisis hits housing – starts and permits fell in September

(REAL ESTATE) New data from the Commerce Department shows a dip in permits and starts, but if you look closely, multifamily is carrying that weight, so how is single family production going?

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housing starts

Last month, housing starts fell 1.6%, which is only a slight dip, but permits fell 7.7%, and the gap between units completed and those still under construction is the largest on record, according to reporting from the U.S. Commerce Department.

While starts and permits hit a year low and while labor shortages, supply chain issues, and rising prices of raw materials, it should be noted that single-family starts actually remained unchanged, and permits for single family homes only fell 0.9%, so what we’re looking at here is a slowdown in the multifamily sector as sales heat up in single family housing..

Another factor at play here regarding still-tight inventory levels is the federal mortgage forbearance program as a response to the pandemic. As the program wraps up, more inventory will come online.

Dr. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) explains: “The current mortgage default rate of at least three months is running high at 3.5% compared to less than 1% before the pandemic. However, foreclosures have been at historic lows so far due to the forbearance support. The default rate will certainly fall as long as the economy continues to generate jobs, but the end of the federal support program inevitably means some homeowners will need to sell. This will be another source of housing inventory.”

Because tight inventory levels have kept the market restricted and sales below what demand is, the residential real estate sector should see hope in this analysis.

But there is no sector safe from the supply chain crisis or prices rising again on raw materials. Reuters reports that many materials like windows and breaker boxes are in short supplies while the cost of building materials have surged, like copper which is up 16%, and lumber prices are jumping back up to record highs set in May.

Homebuilder confidence is up, according to the National Association of Home Builders (NAHB), but their most recent survey also indicates that “builders continue to grapple with ongoing supply chain disruptions and labor shortages that are delaying completion times.”

The Mortgage Bankers Association (MBA) reported today that mortgage applications for new home purchases are down 16.2% compared to September 2020, and applications are down 4% compared to August. It is notable that the average loan size hit $408,522, the highest on record, and another indicator of increasing construction costs.

Going forward, analysts expect the backlog of starts to continue as labor and supply chain issues persist. And although the news isn’t overtly positive, single family housing on its own is actually performing better than in 2020. There is light at the end of the tunnel for hopeful homebuyers.

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Real Estate Big Data

A ridiculously easy way to combat bad reviews from non-customers

(MARKETING) Some ratings and review sites don’t verify reviewers, so what happens when a nasty comment about you is left on a ratings site?

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reviews Woman seated on ground writing cold email to clients.

Have you ever found a business through Yelp that you wanted to like but just couldn’t make up your mind about because of the contrasting reviews of the place? Like a restaurant with the best service but had cold soup and an unresponsive hostess, or a B&B that was warm and clean but had an owner who did not provide the second B come morning time?

Some of these outlying negative reviews can be telling of the business, and I always make sure to read them in case I set my expectations too high (like I did for the eggs benedict from that diner up north).

However, while most reviews do reflect a genuine experience and are useful to would-be customers, others can be exaggerated or even outright falsified.

One such encounter one of our team members had was when searching for a private firearms trainer. Her online search had taken her to a trainer she liked. However, the comments on Yelp for the trainer were horrible.

Before she ran the other way, she saw comments from the trainer that simply said, “This person is not a verified client of [Company Name].” Apparently, he made a tv news appearance advocating for a specific gun right, and people from all over the globe made negative comments.

The fact that they weren’t his clients made her totally disregard their comments, because those reviews weren’t based on his professional performance. Guess who she hired?

Sites that allow anyone to review an unlimited number of businesses naturally risk exploitation. Such review sites make it possible to communicate quick, personal experiences about any business out there, and that also means an easy dig from a disgruntled customer to the place that hurts a company most.

It is up to the business to stay vigilant about what is being said out there and seek out ratings and review platforms that verify customers.

Since customers rely on sites like Yelp, businesses need to maintain their profile in the same way they would maintain their storefront. Just as they would fix the broken lighting in their lobby, they need to acknowledge any unreliable reviews a cranky customer may write about them. By having a human presence on these sites, businesses can breed a sense of integrity and accountability that others will pick up on.

If those scathing and seemingly random reviews had been acknowledged by the supposed perpetrators, I would have had an easier time overlooking the more exaggerated claims, just like my team member did.

By responding, the business provides context for the incident, but more importantly, it shows that they care.

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Real Estate Big Data

Global market panic over Chinese real estate bubble subsides slightly

(REAL ESTATE) Chinese real estate bubble fears shook markets last week, but Evergrande made a big move today to temper the panic.

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chinese real estate

Last week, stock markets internationally plunged due to fears of a real estate bubble in China as their largest real estate developer, Evergrande struggled to make their interest payments on their outstanding bank loans as well as their bonds.

Analysts pointed to the interconnected nature of markets, reminding people that when the housing market crashed in the U.S. back in 2008, all global markets were impacted.

We asserted that the panic was overblown given that Evergrande has a tremendous amount of physical assets ($340 billion to be more precise), and that a restructure was possible which could put them back on track (rather than crumble – which was what markets seemed to imagine last week).

There has been a lot of speculation that the CCP (Chinese Communist Party) would begin pressuring state-owned businesses to prop up the developer.

Today, Evergrande’s stock is actually up as they have raised $1.5 billion in cash to meet their financial obligations.

How did they accomplish this? By selling their 20% stake in Shengjing Bank to the state-owned Shenyang Shengjing Finance Investment Group.

The money will only be applicable to their outstanding interest payments that are past due, and the Chinese government has not made any statement to the effect that they applied pressure or intervened.

The government has been pouring cash into the financial system to assuage fears, adding $15.5 billion to keep liquidity moving.

In a statement this week, the People’s Bank of China said they would “maintain the healthy development of the real estate market and safeguard the legitimate rights and interests of housing consumers.” The statement did not specifically reference Evergrande.

It is important that real estate practitioners keep their eye on this story as it has stoked consumers’ fears, especially when people don’t read beyond a headline.

There won’t be a pop quiz on how much cash Evergrande has on hand, but consumers may mention the Chinese real estate bubble elbowing markets here as a factor in their decision making. Understanding the bird’s eye view of what is going on will help Realtors better address the topic while in the field.

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