Real Estate

Another bubble or sustained growth?

By From page HS3 | June 28, 2013

It’s understandable that some real estate pundits are fearful of another housing bubble. After all, most of us remember the 2002-06 real estate bubble when the median selling price of a county home climbed 86 percent in four years. When the bubble popped, property values plunged 50 percent over the next five years. The experience will have long-term psychological impact on most Americans. Certainly, we should be cautious of not making the same mistakes that led up to the last bubble experience. But are we?

There are similarities that are happening with the real estate market today and what was occurring between 2002 and 2006. The most dramatic is how quickly selling prices are rising. According to the California Association of Realtors, the median price of a previously owed house in California soared 31.9 percent in May. It was the largest year-over-year increase in more than three decades. The Sacramento Association of Realtors reported its median selling price for May increased 42 percent. In El Dorado County our median selling price was up 20 percent.

“This could be a one-time wonder in terms of how fast and how far it went up,” said Andrew LePage, real estate analyst for DataQuick.

Another market bubble similarity is the number of sales and how quickly homes are selling. Monthly sales are now tracking along 2002 -06 levels. Resale escrow closings are averaging 15 percent ahead of last year and new home sales are up 25 percent. In El Dorado County, the median time that a house is listed before it becomes a pending sale is only 17 days and half of all listing have multiple offers.

Flippers contributed to the last housing bubble and they’re back. In 2005 flippers accounted for nearly 15 percent of all regional sales. Flippers purchased homes and never moved in. They simply held for a period of time and resold for a profit.

Low starting rates on adjustable rate loans added hot air to the 2002-06 bubble. Wall Street was investing in mortgages at unprecedented levels. Today the Fed is the one buying mortgage-backed securities and keeping mortgage rates at historically low levels. Many homebuyers are paying above appraisal just to take advantage of the low interest rates.

The bubbliest maintain that the rally in the housing market is largely an illusion. Much of the upward movement in home prices is due to a short supply of homes rather than a groundswell of real demand. In California, home prices are moving five times faster than the underlying growth in the job market. The economic fundamentals are out of balance with the Feds keeping interests rates artificially low. If they’re right, we are in for a correction. However, there are some distinct differences between the real estate market then and now.

“While home prices are increasing at levels above those observed in 2006, the fundamentals of the housing market are much more solid than what we experienced a few years ago,” said Leslie Appleton Young, vice president and chief economist of the California Association of Realtors.

One fundamental difference is larger down payment and stable loan products. The typical down payment for a California homebuyer in 2005 was less than 10 percent. Zero down payment loans were popular and 38 percent of all loans were adjustable or sub-prime loans. Today, down payments are averaging 17 percent, subprime loans have disappeared and 82 percent of loans are fixed rates. Credit requirements in order to obtain a mortgage have also changed. Borrowers must meet the toughest criteria for qualifying for a mortgage in recent history.

Rapidly increasing home prices are a bit of a concern but they will not likely continue at the same rate. Typically, when prices finally reach bottom, they experience their highest bounce. Demand is the highest when consumers have restored confidence that the market is improving. Investors add to the mix. Folks who have been delaying a buying decision all at once decide to move. Increasing prices will bring more homes to market which will ease the pressure on upward prices. Home prices are still a bargain in El Dorado County where our $343,000 median selling price is $75,000 less than the statewide median.

Flippers are back but with a difference. Rather than holding and flipping they are improving first and then selling. The improvements add value to an otherwise distressed property and a bump in the selling price.

Over building contributed to our last housing bubble. That’s not happening today. There were 16,647 new single family starts in our four-county region in 2005. New home building fell to 2,068 in 2011 and about 3,000 new homes last year. The future supply of new housing remains constrained by the availability of buildable lots and the time it takes builders to restart operations.

A study released last month by the University of the Pacific’s Business Forecasting Center provides some guarded optimism for our housing market. The study predicted sizable job growth over the next four years, rising personal income and a population growth of 22,000 to 35,000 a year to our four county region. No housing bubble with those projections from some of our areas foremost housing academics, right? But wait.

This from the university’s housing forecast published in March of 2006: “The housing market is cooling, but not collapsing. The ‘housing soufflé’ is out of the oven and house prices will settle as this sector cools off, but the alarmist predictions of a recession due to a collapse in prices will not come to pass.”

We all know how well that worked out.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached at

Ken Calhoon

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