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Can We Expect Another Real Estate Bubble in The US?

Published on Saturday, January 16, 2016 by Land Century

There is no denying that the housing bubble caused many people to foreclose on their homes. A major catastrophe for the United States, housing bubbles do and will continue to occur especially when the same practices are being utilized time and time again.

News articles are coming out more frequently that indicate that a housing bubble may be about to occur – even just less than 10 years from the previous housing bubble. The major issue is that housing prices are rising so quickly that potential homeowners can no longer afford mortgages. And, mortgages requirements are stricter and down payments are simply too high for the average person to be able to afford. Imagine having to put down a 10% payment on a $300,000 mortgage not including closing costs and other expenses that you'll accrue.

A few news articles have been released in the past few months that shed some light on the problem:

National Review
Fortune
The Motley Fool

We’ve picked these three resources because they debate on both sides of the argument: an imminent housing bubble and a healthy housing market. Interestingly, prices for homes are 3% shy of what they were in 2007 when the housing bubble occurred. This doesn’t demonstrate the full story or picture of the current issue in the housing market today because prices rise every year.

Some markets are having abnormally high prices for homes, such as San Francisco. A few points that are staggering include:

* The median household income in San Francisco is $77,000.
* Home prices during the last housing bubble were approximately $750,000 in San Francisco.
* The median home in San Francisco is now selling for $1.4 million.

The income of these homeowners does not warrant a home that is worth $1.4 million. Furthermore, it is unclear and how these individuals are affording their homes. It’s a major issue, and house prices are increasing so drastically over just the last seven years that it’s going to be impossible for anyone outside of the top 1% in the United States to afford a home in San Francisco. California as a whole is struggling with housing prices that are simply unaffordable.

Los Angeles, Irvine and Los Feliz California have all seen their housing prices increase, but these are richer areas of the state. Housing prices also increased dramatically in several other cities including:

* Austin where house prices have increased by up to 13% in the last year
* Central Florida where housing prices have increased by as much as 28%
* Chicago where prices have climbed 11% in just six months
* Texas where prices have increased by 8% in the past year
* Seattle where prices are up 10% on the year

In Seattle, the median home is now priced over $500,000 for the first time in history. The main issue is that many people cannot afford a mortgage of $500,000 especially with property taxes, rising electric bills and other concerns. Prices are simply too high for most people to be able to afford, yet they have no other option if they want to buy a home in these areas.

A result is causing many people to:

* Relocate as seen in Texas. Many people California are relocating to Texas, but the end result is that prices are now rising in the state.

* Many people, even those with great jobs, are now working more due to the increase in living.

In Fortune magazine, a recent publication indicated that housing prices are overvalued by 25% 60% according to analysts. This article was just released on January 11, 2016. The good news is that the article states that irresponsible mortgage lending is not causing prices to increase, but prices are much higher than the fundamentals of the US economy simply justify at this moment according to the article.

Unorthodox capital is being used to purchase homes, and prices are being driven up by institutional investors. These are individuals that are buying second and third homes and serving as landlords in many areas. Many foreign buyers are also putting their cash in American real estate, and the argument is that many people in the Bay Area are earning $180,000 per year but pay $1.45 million for homes. Given insurance costs, car debt and credit cards, these individuals should be purchasing homes in the price range of $778,000.

The article argues that prices will fall as investors flee the market, but this is not going to happen anytime soon.
Rent prices may also be in a bubble as many people are seeing rent prices rise dramatically. Phoenix is a good example of rent prices that are at bubble stages. The average household cannot afford to rent a two-bedroom apartment according to statistics.

Analysts suggest that prices may be doing what they’re supposed to do – fluctuate. Prices during the bubble are almost a decade old, so they may just be leveling out. New home inventory is a major issue for the housing price increase, and a strengthening job market is a good sign for homebuyers. Analysts also suggest that interest rate hikes may be a concern in the future, and the United States is scheduled for four hikes this year. The severity of these hikes will be the ultimate deciding factor on the real estate market in 2016.

Experts definitely realize that there is a potential issue with the housing market, but they also state a collapse will not occur in the foreseeable future. Impact will be felt, such as less people buying homes, but there will be less of a dramatic crisis as be seen in 2006 and 2007.

It is my firm belief that if housing prices continue to rise as they are at their current rate, there will be a major issue in the real estate market in the coming year or two. Which is why you cannot go wrong with investing in cheap houses and land right now. Job wages are not growing at a rate that allows for a sustained increase in the housing market, and the current increase may be short-lived. Only time will tell if a housing bubble is imminent, but it is definitely a concern for many home buyers.
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