Historically, house prices have tracked inflation. Robert Shiller, creator of the Case Shiller House Price Index, predicts the future will be more of the past.
From The Daily Ticker (emphasis mine)
Shiller says the housing market is operating in an “abnormal economy” where the Federal Reserve is buying $40 billion worth of mortgage securities and $45 billion worth of Treasury notes each month. This has driven mortgage rates to record lows.
According to Freddie Mac’s weekly survey out last Thursday, the average rate for a 30-year fixed rate mortgage is a record low 3;4%; for a 15-year fixed rate mortgage it’s a record low 2.61%. The Fed will eventually stop buying these securities, says Shiller, and mortgage rates will rise.
Shiller, also an economics professor at Yale University, says the biggest home price increases now are seen in multifamily rather than single family homes which reflects a shift from home ownership to renting. The buyers are investors who rent their properties.
“Most of the increase in households in this country has been met by an increase in renting,” says Shiller. “My own survey data with Chip Case confirms that people feel more positive about renting.” He suggests that those investing in real estate buy homes that are most suitable to convert to rentals.
Another shift that Shiller observes in the housing market is the growing popularity of urban areas and suburbs near those areas.
Shiller says people don’t want to commute long distances because of relatively high gasoline prices and in the current “ideas economy,” many want to live in close proximity to others.
There are also demographic shifts: aging baby boomers who no longer enjoy working on the upkeep of their homes and the increase in single-person households.
When asked where this all leaves the housing market 10 years from now, Shiller says home prices will be “about where they are now” after adjusting for inflation.
So, is Robert Shiller right?
He's right about the abnormal stimulus. Historically, the Fed primarily utilized the discount rate to set the risk free borrowing cost. Today, they're doing a lot more including these programs to buy trillions in housing debt. When rates rise, monthly payments will also, slowing the housing market.I've had many conversations with my clients about the timing of rising rates. We've also talked about it at the Boulder Real Estate Meetup. Nobody has a crystal ball, but it seems likely that rates will remain low until after the elections of 2014. The exception is if there are clear signs of the economy growing too quickly (i.e. inflation above the the Fed's benchmark of 2.0%). Instead, we're seeing the opposite. Read Fed's Credibility Tested for more details.
As for the idea that housing will track inflation, it's likely both right and wrong. On average, Shiller is probably right. Good thing our market is far from average. When it comes to specific locations and property types, there will likely be strong gains.
1. Desirable areas to live will continue to appreciate at a faster rate than "average house prices" because people and capital are more mobile than ever. Read The Rise of the Creative Class.
2. There is increasing demand for lower maintenance living.
3. Demand is also rising for urban areas with easier commutes.
4. Energy efficient and alternative energy supplied housing will increasingly be attractive.
5. Good design, matters. At all ends of the housing spectrum but particularly relevant for higher end housing.
My Market Prediction
I'm advising my buyers and sellers to expect another 12-18 months of high market activity. Inventory will begin to rise as builders bring new product to market in outlying areas. Owners will see prices rise to levels last seen in 2006/2007, which will provide the needed encouragement to sell. Eventually, rates will rise too - cooling the market further, but expect a short frenzy when rates initially start to move upward.In Boulder, specifically, we have hundreds of new rentals coming this year. That should help the entry level cool off a bit as prices flatten in the rental market. Remember, 51% of the Boulder real estate market is rentals. No analysis is complete without a discussion of income property.
Keep in mind that my crystal ball is far from perfect. Although I expected the market to return to health, I didn't anticipate the current inventory shortage. There was also clearly pent-up demand. Sales volume is up 16.8% and 17.3% for the twelve month period ending April, for Boulder houses and attached dwelling respectively.
Meanwhile, a lot of sellers are waiting on the sidelines. What are they waiting for? Higher prices.
Although I've been very successful helping my buyers in the current market, it hasn't been easy. In a normal market, I'm advising buyers on how far we can drive the price below asking. Right now, I'm advising Buyers on strategies that can win a bidding war without going over budget (and not necessarily by being the highest price).
For sellers, the key is to choose an agent who can professionally manage the auction environment. Sellers are in the driver seat in this market and should use that leverage wisely. My last deal had NINE competing offers. The typical agent is overwhelmed by that sort of thing and has limited experience in handling an auction. Be very careful selecting your listing agent.
It's a jungle out there.
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Please note: My goal is to provide exceptional service to our clients. The ideas and strategies in this blog post are the opinion of the writer at the time of publication. Careful and complete due diligence is strongly advised before buying or selling real estate or other investments. Consult with your professional advisers before making financial decisions. This article is not intended as legal, tax, or investment advice. Silver Fern Homes will not be held liable for investment choices derived from this article.
Please note: My goal is to provide exceptional service to our clients. The ideas and strategies in this blog post are the opinion of the writer at the time of publication. Careful and complete due diligence is strongly advised before buying or selling real estate or other investments. Consult with your professional advisers before making financial decisions. This article is not intended as legal, tax, or investment advice. Silver Fern Homes will not be held liable for investment choices derived from this article.





























