July 23, 2013

A housing bubble it's not – yet

Prices jump in some areas, but they had fallen so low the trend is better defined as a rebound.


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New houses are being built at The Reserve at Triadelphia Crossing in Glenelg, Md., offering $1 million-plus homes on one-acre-plus properties.

Andrew Harrer/Bloomberg News

"Because mortgage rates are still near long-term lows, and because prices fell so much after the housing bubble burst and remain low relative to rents even after recent price increases, buying is still much cheaper than renting," Kolko said in a blog post. "Mortgage rates would have to rise a huge amount -- to 10.5 percent -- to tip the math in favor of renting."

The presence of large numbers of troubled properties also differentiates the current housing market from those in the past. While shadow inventory -- which includes properties with seriously delinquent mortgages, in foreclosure or held by mortgage servicers -- has been declining, it remains relatively high.

Shadow inventory dropped to about 2 million homes in April from a peak of 3 million in early 2010, but far higher than 650,000 in early 2006, according to CoreLogic. Fewer distressed homes, which are sold at a discount to other properties, means that year-over-year price comparisons are skewed up. As distressed homes work their way out of the system, this effect will decline.

For those who are dubious about the housing market's health, here's one potential red flag: House flipping is back.

So far this year about 250,000 single-family homes have been sold that were also sold within the prior 12 months, according to RealtyTrac, an online foreclosure marketplace. If that pace is maintained, there could be about half-a-million flipped homes by the end of the year, up 4 percent from last year and almost double the total in 2005.

"Yes, there is a red flag. High levels of flipping are indicative of a market that is speculative and at risk of becoming overheated," said Daren Blomquist, vice president at RealtyTrac.

But Blomquist said the high level of flipping is likely a short-term trend given recent flipping dropoffs in areas such as Southern California, Phoenix and Las Vegas.

"If that pattern is repeated in other parts of the country in the next six to 12 months, then it will be a sign the market is not getting overheated," Blomquist said. "However, if flipping continues at a high level, then it could indicate another housing bubble forming in some markets."


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