Sound the alarm! We're witnessing another real estate bubble. At least, that's what the mainstream financial press wants to scare us into believing. A recent Bloomberg article, entitled "Brooklyn to California Bubble Threat Grows in Rebound," recounts an all-too familiar tale from the go-go days:
An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000, drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house.
Bidding wars! The ultimate sign of a bubble, right? Not so much…
The Same, But Different
Let's ignore, for a moment, that Bloomberg cherry-picked these examples, and that they're completely out of touch with reality. (The median price for a house in the United States remains below $200,000. Yet Bloomberg uses million-dollar listings to characterize the broader market.)
The real reason we're "hearing stories of frenzy - lots of traffic and multiple offers," as Paul Willen at the Federal Reserve Bank of Boston puts it, isn't because we're in another bubble. It's because inventory remains at mind-numbingly low levels.
You see, for a normal (and healthy) market, we need about six months' worth of supply. Yet home inventories rest at just above 1.9 million units, which equals about 4.7 months of supply, based on the current sales rates. And inventories keep dwindling on a year-over-year basis.
According to the National Association of Realtors (NAR), listed homes for sale are down 16.8% from last March. The declines aren't regional, either, considering that 135 out of 146 markets tracked by NAR experienced year-over-year inventory declines. And about one-quarter of the markets witnessed declines of 20% or more.
So there's no way we're getting to six months' worth of supply any time soon. Not unless home construction activity picks up in a major way. (FYI: New home construction remains 66% below the peak, which also flies in the face of any bubble talk.)
Now, when you couple this scarcity of listings - particularly high-quality ones - with historically low interest rates, what do you get?
Competition for properties, of course. It's the basic economic principles of supply and demand at work. Or, as real estate agent Barbara Brown-Allen told Bloomberg, "Once the inventory is this short, you have a lot of people vying for the same properties."
But we don't have to fret about this situation leading to another bubble. For two reasons…
Two Factors Keeping a Lid on Prices
First, increasing mortgage rates promise to slowly erode record affordability.
Borrowing costs for a 30-year fixed mortgage just hit 3.51%, the highest level in six weeks. As rates creep higher, it should help contain demand.
Second, as I shared in late February, most mortgage applicants now boast FICO scores above 740. So lending standards remain tight.
The NAR's Chief Economist, Lawrence Yun, says that's a bad thing. In his latest report, he said, "The bad news is that underwriting standards remain excessively tight." That's not bad news, Mr. Yun. It's great news! Insisting on higher credit scores ensures that the real estate market doesn't get (way) ahead of itself… again.
Or, as Jonathan Miller - President of the real estate appraiser, Miller Samuel Inc. - says, it's "keeping the process close to honest for the time being." I think Mr. Yun would agree that a little honesty is certainly not a bad thing!
Bottom line: Despite all the fear-mongering, we're not in another real estate bubble. Not yet, at least. So we should continue to look for ways to profit from the recovery.