Profit Big from the Housing Recovery

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Profit Big from the Housing Recovery

For the first time since 2005, all of the country's 50 most populous cities are seeing higher housing prices.  That should be a good sign for the economy.  But Fitch Ratings and certain other analysts argue that the market is showing signs of overheating and say that the current pace is not sustainable.1

According to the Fitch analysis, home prices across the country were overvalued by an average of about 17 percent as of early November 2013, and by more than 20 percent in coastal California.  Fitch expects San Francisco and San Jose to set new home price records by the end of the first quarter of 2014, making the market nearly 30 percent overvalued.  Their report contends that conditions in the heart of Silicon Valley at the end of 2013 resemble the environment in 2003.

Prices are being driven by investor interest in flipping homes, another familiar phenomenon.  Fitch estimates that half of all homes in the Bay Area are now bought with cash, and that's "often indicative of investor behavior."

On the other hand, economist and Nobel Laureate Robert Schiller says home prices on a national basis are reasonable, and he is not really worried about bubbles, right now.  According to Schiller, "We just went through the biggest bubble in U.S. history, so I wouldn't expect that to repeat...maybe not in our lifetimes."

One reason he cites is homeowner expectations.  According to Schiller, in the short term, homeowners expect price gains of 8 percent per year, but over the long term, homeowners are only expecting 4 percent per year, "which is reasonable."

The Trends editors agree with Schiller.  On the other hand, there is some indication that the West Coast is not far from a bubble.  As we mentioned, the Bay Area seems to have gotten ahead of itself.   Similarly, consider what Trulia's Bubble Watch report is telling us about crucial metrics like:2 

  • The price-to-income ratio
  • The price-to-rent ratio
  • Prices relative to their long-term trends using multiple data sources

Based on those fundamental metrics, U.S. home prices are about four percent under what Trulia would consider "fair value."  For reference purposes, consider that eight years ago, at the beginning of 2006, U.S. home prices were 39 percent above fair value, and they were 13 percent below at the beginning of 2013...

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