2018 Real Estate Bubble? by Brian Pate

Could there be a 2018 real estate bubble? What truly causes a housing bubble and the inevitable crash? For the best explanation, let’s go to a person who correctly called the last housing bubble – a year before it happened.

“A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation…Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the ‘bubble’ bursts.

I have taken to calling the housing market a ‘bubble’.”

– Bill McBride of Calculated Risk calling the bubble back in April 2005

Today’s Raleigh Real Estate Stats:

December 28, 2017:  6,804 listings, Avg DOM 122 Med DOM 85 days, median list price $329,000

Where do we stand today regarding speculation?

There are two measurements that are used to determine the speculation in a housing market:

The number of homes purchased by an investor:

There are a significant number of homes in Raleigh being purchased by investors but it is not any different than has been for the past few years.  People are realizing the quality and stability of real estate as an investment.

For example, the stock market has climbed over 5,000 points this year.  Most analysts agree that it is over valued and ripe for a significant correction. Although the market has been strong this year, real estate has still had better returns over the long run and that is why it is such a popular investment.

The number of homes being flipped (resold within a twelve-month period):

Although there are some flippers in the Raleigh market, it is very difficult to buy, fix up and flip for a profit large enough to truly make a it worthwhile.  That is why we are seeing fewer flippers in the current market.

As compared to 2005, investor purchases are down dramatically (from 23% to 13%) and so is flipping (from 8.2% to 5.7%). McBride explains:

“There is currently some flipping activity, but this is more the normal type of flipping (buy, improve and then sell). Back in 2005, people were just buying homes and letting them sit vacant – and then selling without significant improvements. Classic speculation.”

What are the experts saying about speculation in today’s market?

DSNews recently ran an article which asked two economists to compare the speculation in today’s market to that in 2005-2007. Here is what they said:

Dr. Eddie SeilerChief Housing Economist at Summit Consulting:

“The speculative ‘flipping mania’ of 2006 is absent from most metro areas.”

Tian LiuChief Economist of Genworth Mortgage Insurance:

“The nature of housing demand is different as well, with more potential homeowners and far fewer speculators in the housing market compared to the 2005-2007 period.”

And what does McBride, who called the last housing bubble, think about today’s real estate market?

Sixty days ago, he explained:

“In 2005, people were just buying homes and letting them sit vacant – and then selling without significant improvements. Classic speculation. And even more dangerous during the bubble was the excessive use of leverage (all those poor-quality loans). Currently lending standards are decent, and loan quality is excellent…

I wouldn’t call house prices a bubble – and I don’t expect house prices to decline nationally like during the bust.”

The big key to the Raleigh real estate market right now is the demand for homes under $250,000 and the lack of quality inventory. Buyers are having to snag whatever they can and must be willing to make significant improvements to older properties rather than having options in Wake County to buy brand new for under $250,000.  There are a few possibilities in outlying areas but not a significant amount of choices.

Bottom Line

Speculation is a major element of the housing bubble formula. Right now, there are not elevated percentages of investors and house flippers. Therefore, there is not an elevated rate of speculation.