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Harold Willig: No More Housing Bubbles?

A July 2016 report says that there’s no housing bubble to burst, particularly in the 10 metropolitan regions with record-high median prices like San Francisco, San Jose, Austin, Salt Lake City, and Dallas.

“There is no evidence of the systemic risk of the mid-2000s housing bubble," the report said. "In fact, what is happening now is the opposite of what occurred during the housing boom of 2004-2006 – credit remains tight; flipping is not rampant; and new construction is severely constrained.”

Chicago, where SpringView Investments currently owns and manages more than 100 single-family homes, was not listed in the top 10 metropolitan areas for overheated prices.

What typically creates housing bubbles? The primary factors include:

1. Real Price Appreciation “In a bubble situation, price appreciation substantially outpaces inflation,” the report said. “Rapid price growth is not in and of itself proof of an unhealthy market, as substantial price gains can occur in other scenarios such as in the early stages of a recovery.”

2. House Flipping

“Heightened flipping activity is a clear indication of speculation in the real estate market. In an inflated housing market, expectations about short-term profit from pure price appreciation are very high; therefore, the level of flipping activity would show evidence of being heightened.” The report did not see evidence of heightened flipping activity.

3. Mortgage Transactions as a Share of Overall Sales “Loose credit was one of the main culprits of the housing crisis,” according to the study. “Mortgage lending expanded dramatically as unhealthy housing speculation reached its peak and was met by the highest level of credit availability as measured by the Mortgage Bankers Association.”

4. Price to Income and Price to Rent Ratios “Home prices relative to homeowner income and prices relative to rent provide perspectives on the fundamental valuation of homes, said the report. “If a ratio is far outside of its historical norm, we can infer that the housing market is priced outside of its normal pattern.” The report saw no such evidence in today’s current market.

5. Household Formation to New Home Starts Another difference between 2008 and now is the current relative balance between new housing starts and new home formation. “In a balanced market, new starts and new forming households should be in-line with each other. Over the long term, there should be slightly more than one household formed for every new single-family start, as construction is necessary to keep the housing stock in alignment with the number of home owning households.”

The report also indicated that the high-growth rates in the top 10 metros were unsustainable. Why? More renters, more doubling up with roommates, and more relocation to more affordable cities.

See the full report here.

For more information on why your should consider investing in a professionally

managed portfolio of single-family homes, please contact Harold Willig at 917-209-4452.

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