And the beat goes on………
The Case/Shiller Housing Index showed a 9.6% gain, year-over-year, in urban areas this past year. This is the highest percentage increase since 2006. The increase is larger in Northern Virginia.
A few people are beginning to recognize the surging prices and asking if we are getting close to a top. My answer: No.
Readers of this blog have been serenaded with a steady drum beat predicting higher prices for more than a year now. The following will tell you why this is going to continue:
- Interest rates remain ridiculously low, and appear to be staying there for the foreseeable future. This is driving affordability, and the rent-versus-buy equation has completely flip-flopped to benefit the buyer.
- Lack of supply for sale continues to create the most incredible supply/demand imbalance we have seen since the bubble. Yet sellers continue to give away this advantage by listing their homes too low and trapping themselves into sales which are capped by “the appraisal issue.” If sellers and listing agents became more diligent and intelligent about making sure buyers pay true market levels and do not force contract prices lower after the fact by using “low appraisals” as a weapon, prices would be significantly higher today. And they should be higher.
- The current surge in prices is happening despite the artificial constraint of low appraisals, and in the face of the very real constraint that millions of buyers are being denied credit who normally would be buyers today. I expect moves to loosen up many credit constraints, which will only add more buyers to an imbalanced supply/demand equation.
- When you account for interest rates, prices being paid today are not at all inflated, but actually LOWER than where we were five years ago. Carry costs of owning a home have plummeted.
- If Alan Greenspan was villified for fueling the 2006-2008 housing “bubble” with excessively loose credit leading to “low interest rates which drove excessive buying”, where does that put Bernanke today? In Greenspan’s heyday, a $300,000 mortgage using the 30 year loan cost $1,885/month. Today, that same loan costs $1,343 per month and principal pay down in the early years is almost three times more. To me, this implies a relative bargain for current buyers way beyond what we have seen in a long time.
- The Northern Virginia economy will continue apace.
Far from being overheated, there are forces at work today constraining housing prices from surging much more than market conditions would allow if we were truly in a free market, supply/demand situation.
I realize that the above is not what you are hearing from the general market pundits or Wall Street “experts.” But then again, none of them have been on board with me for the last 18 months, as the Ray MaxTeam has been consistently predicting a major housing recovery and much higher prices. Eventually, prices will reach their true level, which is higher than today’s levels. The catalyst will likely come from a breakdown in today’s articficial and self-imposed barriers rather than any new source of economic information.
Chartered Financial Analyst, CFA