Real Estate Bubble

Image Source (orlandoareahomes.org)

Are you frustrated that your dream home is out of your reach?  Are homes in your area un-affordable?   Well, you are not alone.  Is the real estate bubble back?

Analysis of mortgage data by Zillow (Z)of income, mortgage and home value data in the fourth quarter of 2013,  shows that more than one-third of homes for sales in US are too expensive for the local residents!   This analysis goes counter to claims by Real Estate industry associations that homes are indeed more affordable now than before the crash.

And if you recall, sustained low interest rates and flow of easy money was instrumental in creating a bubble that led to the crash in the 1st place.  And that’s what worries Stan Humphries, Zilow’s cheif economics who says “We’re not in a bubble yet, but we’re beginning to see the early signs of one in some areas.”

Buyers are routinely being forced to consider pockets outside of metro markets to be able to afford homes.  This was yet another indication of the market’s frothy behavior in California where areas outside Sacramento, Fresno and Bakersfield were developing as rapidly as buyers could grab them ahead of the crash.

According to this Zillow analysis, more than 50% of homes currently for sale in Miami (62.4%), Los Angeles (57.2%), San Diego (55.3%), San Francisco (55.2%), Denver (52.8%), San Jose (50.9%) and Portland, Ore. (50.3%) are unaffordable by historical standards. Nationally, Zillow analyst found that one-third of homes are currently unaffordable.

Compounding the problem is the rising mortgage interest rates rise which is making the affordability picture much worse than it could be where most 2nd time buyers will not be able to afford to buy another home even if they sold their home at a hefty profit.

Home buyers in Los Angeles, San Francisco and San Jose are expected to pay a much larger share of their monthly income today toward a mortgage than during the pre-bubble years.  And that does not bode well for an economy which depends on consumer spending for growth.

According to Zillow mortgage rates on a 30 year fixed-rate mortgage will reach 5% by the first quarter of 2015 which can not be good news for anyone looking to buy a home.

In a recent article on San Jose Mercury News, Pete Carey the real estate beat writer interviewed Economist Ken Rosen of the Rosen Consulting Group in Berkeley who expects the price increases to slow when interest rates rise and when more homes come on the market in response to higher prices.

How can you modify your plans to deal with these conditions? Some Americans are opting to rent instead of owning which certainly is an option.  But I didn’t think that was part of the American Dream.

Let us know what you think.