Current bubble no reason to shy away from buying




COMMENTARY /// Real estate trends

Have the dramatically increasing real estate prices affected your ability or motivation to purchase a home? Are we experiencing another real estate bubble?

We have experienced a pair of real estate bubbles in the last 30 years—once in 1992 and then again in 2008. A contributing factor in both crashes was flawed real estate values.

Stated income loans were birthed by World Savings and Loan back in 1987. Unfortunately, rampant falsely stated income resulted in a pandemic of unaffordable home mortgages. Every incremental 1 percent of false income skewed the appraised values by 1 percent. False incomes created false real estate marketplace values.

Yes, this is ancient history— almost 10 years ago. What does the false marketplace of the Great Recession have to do with our real estate market today?

Homebuyers today must financially qualify for their real estate purchase. Our market is now supported by buyers who can afford the sales prices.

Then why are real estate asking prices dramatically increasing annually? Are homebuyer incomes rising at the same pace as home prices?

No, wages are not increasing at the same explosive rate of homeprice increases of the past several years. What is causing today’s rapid increase in home prices is lack of supply. We have a housing shortage.

Burdensome regulations and a public “I have mine and do not want you to have yours” sentiment have contributed to a shortage of homes, which shows no signs of abating.

Yes, potential homebuyers who make enough money to qualify for today’s prices are few. Unfortunately, the number of homes available for sale are even fewer than the number of two-income families who can afford these prices.

So, am I telling you that we will eventually run out of buyers who can afford current rising home prices, which will lead to price decreases?

No. The housing shortage is severe. It took decades of regulation and bad real estate market cycles to get to our current shortage. It will take decades to build our way out.

I believe we will see a series of rising and plateauing home prices, muddling through the plateaus and then a new rising home-price cycle.

Two good reasons you would want to buy a home in today’s market: one, rent inflation and, two, home price inflation.

The inflation dragon is not dead, just in a deep sleep. While sleeping, the inflation dragon has been fed a monster $19-trillion diet of government debt (in case you were wondering where those toxic 2008 assets disappeared to).

Who or what is going to wake the sleeping dragon in our future? When this creature awakens you want to be prepared.

If you are renting, your monthly rent will start rising—perhaps at a rate substantially larger than the tech Bay Area rent increases of the past few years.

However, if you buy a house today on a 30-year fixed mortgage, your housing expense (rent) will remain fixed while your home value will rise with the awoken inflation dragon.

Real estate is an excellent inflation hedge.

Will we continue to experience sharply increasing home real estate prices? Yes and no. All markets are man-made fictions subject to rise and fall. The real estate market is no exception and can fall—but not in our near future, when real estate prices will experience a few plateau and muddle cycles.

Today it is the middle of summer 2017 and I feel a slight breeze of change—an approaching, maybe short-lived, real estate price plateau. Prices will muddle along for a time until the “continuing to worsen” home shortages will stoke prices upward to another plateau.

Home real estate in California has always taken a higher percentage of our incomes. And for a while, as we muddle, an even higher percentage of our incomes will be required for California home prices into at least the next decade.

Robert Bianchi is a mortgage broker with London Funding in Westlake Village.