In general, a surge in the price of any asset tends to bring a smile to the face of most investors.
But because among the currently surging is the U.S. housing stock – and we saw where that brought us not even five years ago – it seems entirely plausible to consider whether too much of a good thing can be, with apologies to Mae West, something less than wonderful.
As Marketplace recently noted, housing is continuing on a tear.1 The latest 20-city S&P/Case-Shiller Index from March showed prices up more than 10% from a year ago, continuing a recent trend in the past few months in the all of this country’s major cities.
As you’d expect, this has provided a lift for stocks leveraged to both the perception and reality of a sustainable housing recovery. The Housing Recovery motif, a portfolio of stocks in housing industry, is up 10.5% so far in 2013, and has increased 30.9% in the past 12 months.
According to Marketplace, most economists aren’t fretting (or saying the b-word [bubble]) at these rates of price increases. For the most part, everyone benefits: homeowners get an increasingly better chance at selling at a profit, homebuyers can still get into a rising market while interest rates are still relatively low, and state and local governments can benefit from property taxes and real-estate transaction fees.
Supporting that this-is-no-bubble talk is the contention that what we’re seeing here is simply supply and demand: housing construction is still depressed in all but one US state (way to go, North Dakota!), and that, as economist Patrick Newport told Marketplace, is why you’re getting a surge in home prices.
In addition, it appears as though the biggest gains in housing prices are occurring in markets that suffered the most pain during the last recession – places like Phoenix, San Francisco, Las Vegas and Miami.
That, however, is what worries economist Dean Baker, who told Marketplace that he worries that as mortgage rates rise, housing prices could once again stagnate or fall, in order to keep housing affordable for consumers who are seeing essentially no real rise in their incomes.
That concern dovetails unpleasantly with a recent New York Times story that housing prices in many of the most depressed markets may have seen the spike in demand in large part because large investment firms have spent billions of dollars in the past year buying homes there – a trend that will not likely continue. As a result, regular consumers are being squeezed out – and wondering if prices will roll over if the big money stops coming in (one eye-opening statistic revealed that asset-management firm Blackstone has bought 26,000 homes in nine states).
Still, it’s worth mentioning that US housing prices as a whole, which ended up falling about 35% in the last housing bust, are still only up about 11% from the trough.
However, it may be instructive for investors to weigh how much of that 11% rise has come from legitimate sustainable demand for homes – and how much is an attempt by Wall Street to time another round of house-flipping.
1Mitchell Hartman, “Home prices are rising fast. Should we be worried?,” marketplace.org, May 28, 2013, http://www.marketplace.org/topics/economy/home-prices-are-rising-fast-should-we-be-worried, (accessed June 5, 2013).
2Nathaniel Popper, “Behind the Rise in Home Prices, Wall Street Buyers,” The New York Times, June 4, 2013, http://www.cnbc.com/id/100786803.