Mark Hanson: “Why We Could Be In A Housing Bubble Right Now”

Mark Hanson: “Why We Could Be In A Housing Bubble Right Now”

Let me preface this note by saying “I am a raging bull over houses”. I love real estate. On any given Sunday you can find me and my family touring open resale houses or new builder communities. My grammar school-aged kids love it too; especially the free cookies and peering into the beautifully staged rooms and really believing that some lucky kid has every gadget or musical instrument ever made and with utter amazement on how clean he keeps his room. Of course, my wife and I fully propagate the lie by saying “did you two see how clean the Lennar boy and Pulte girl keep their rooms? Why can’t you do the same?”

I think it’s safe to say that America — especially the American media and Wall Street firms — has fallen in love with real estate again. But, this time around it’s not ‘all of America’ like the last time; when the most exotic mortgage loans known to mankind turned every ma and pa end-user homeowner into a raging speculator. One has to look no further than the generationally low level of purchase loan applications — with rates at generational lows — to realize something isn’t ‘normal’ about this housing market. Rather, controlling this housing market over the past three years has been a small, unorthodox slice of the population that “invests” in real estate using tractor-trailer trucks full of cash-money slopping around the financial system put into play specifically for this purpose. Over the past few years so much cash-money has been deployed into the housing sector by unorthodox parties, that in many regions ma and pa end-user hasn’t stood a chance to buy. Especially, if they need a mortgage loan, which of course presents numerous risks to the seller vs the all-cash buyer.

In part, this is why I believe we could be back in a house-price bubble right now and not even realize it. And also because everybody is looking at the wrong thing…house prices. Sound confusing? It’s not, really.

A brief history of the

In closing, I do think higher house prices are mostly always good. That’s of course unless the reason for the rise is “unfundamental”.

General consensus has once again returned to the overwhelming belief that “house prices always go up and 2007 to 2009 was a fluke”. That’s plain wrong and dangerous.

I am not calling for another house price crash even though I think that housing is back in a bubble based on the monthly payment comparisons between now and 2006. What I am saying is that housing runs a real risk of price downside if the new-era investors — that have largely supported the entire sector and run up house prices beyond the reach of the average end-user through cheap and easy liquidity over the past three years — take their balls and bats and go home.

On the other hand, bubbles can deflate while house prices remain flat if the underlying fundamentals improve rapidly…strong employment, income gains etc. But fundamentally-driven housing markets take a lot time to develop, especially after so many years of running on unfundamental stimulus. Perhaps our economy can “grow into” today’s house prices over the next few years. Perhaps not.

As we saw in 2007 nobody can predict what house prices will do and the general consensus is usually the wrong one. Be careful out there. Buy a house because you need shelter and buy what you can truly afford using a 30-year fixed mortgage. Don’t buy because everybody else is unless you can clearly afford it — both financially and psychologically — especially if next chapter for this housing market is a consolidation of the past few years of gains.

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