A real estate bubble can happen for a number of reasons. One example is when there is a rapid increase in property values, not supported by solid economic factors such as rising wages. Eventually prices reach unsustainable levels and then decline, often rapidly. That’s what happened beginning in 2003 when in May the median selling price of a home in El Dorado County was $319,000. By May of 2006 the median selling price had climbed 56 percent to $500,000. Then the bubble popped. The run up in home prices could not be supported by solid economic data. Over the next five years home prices retreated and by May of 2011 the county’s median selling price stood at $250,000.
That unpleasant experience was duplicated all over the country resulting in 7.5 million homeowners losing their homes through foreclosure or short sales. It cost taxpayers about a trillion dollars, plunged the country into the Great Recession and has certainly made a lasting impression. Since then, our country has made it a national priority that we never have a repeat performance. For insurance, the Feds have taken unprecedented steps to regulate every aspect of the mortgage financing.
Looking back maybe we deserved what we got. Did we really believe that the value of our homes could continue going up 15 to 20 percent a year? At that rate of appreciation we were willing to do most anything, pay any price, to ride the train to financial independence through homeownership. Our homes were the vehicles that financed our lifestyle. They became ATMs for millions of Americans who withdrew a trillion dollars in home equity. Our economy revolved around debt and rising home values making it all possible. Okay, so that’s all water under the bridge. There is no way, after what we have experienced, we could ever have another real estate bubble, right? Well, maybe not.
In May of 2011, the median selling price of a county home was $250,000. Last month, the median selling price for the same size house was $379,000. That’s a 51 percent increase in 3 years, a bit reminiscent of the increase we experienced between 2003 and 2006.
Many communities in the county are experiencing even higher appreciation rates. According to the statistics furnished by the El Dorado County Association of Realtors, the average selling price of a home in El Dorado Hills jumped 22 percent from last year, Placerville homes shot up 27 percent in a year and homes in Somerset/South County experienced a 70 percent increase. Does this rate of appreciation remind you of anything?
Rapidly increasing property values by themselves are not indicative of a bubble. Bubbles occur when increasing prices are not supported by a similar growth in personal income or job growth. When that happens, housing becomes unaffordable and prices begin to retreat. So as long as new jobs are being created and personal income is growing, another real estate bubble is unlikely.
It would appear that the economy is doing pretty good. The Labor Department reported 217,000 new jobs were created in May. It was the first four-month stretch of job creation above 200,000 since the boom days of the late 1990s. With over 800,000 new jobs created in the last four months, housing sales should be breaking records. But they’re not. National home sales are running 6.8 percent less than a year ago, California is off by 7 percent and El Dorado County sales are 14 percent lower than last year.
A few small details, hidden in the jobs report may explain why housing sales are not sizzling this summer. While the economy is adding lots of jobs, most are in low-paying accommodation, food-service, retail and temporary service. So while lower paying jobs are expanding, we have lost 1.5 million higher-paying manufacturing jobs.
May’s Labor Report also says that a larger percentage of folks are not working. The labor participating rate, currently at 62.8 percent, remains below the 66.2 percent at the beginning of 2008. Personal income, after adjusting for inflation, hasn’t improved since 2007 and although 217,000 jobs were added last month, another 200,000 folks started looking for work, which is one reason the unemployment rate remains unchanged at 2008 levels. If economic growth and wages are not pushing up home prices, what is?
The lack of inventory has been credited for our recent run up in prices. That would make sense if supply were short but it’s not. Current county residential listings are at a three-year high. With a questionable jobs report, no increase in personal income and lots of homes on the market, what’s responsible for the spike in home prices?
Zillow asked that question to 106 noted economists and real estate experts. More than 90 percent said these recent price hikes were either already inflating a bubble or had a moderate to high risk of inflating one. That’s scary.
An alternative view is that prices have “bounced” back, having been artificially depressed by all the foreclosures and short sales. When the distressed inventory disappeared, property values bounced up to where they should be in a normal market. The recent gains are not a reflection of a price bubble but the real market value. That would certainly be the preferred explanation, but if prices climb much higher this year, I’m getting out my umbrella.
Ken Calhoon is a real estate broker and can be reached at [email protected]