Consumers continue to ask, ‘Are we in another real estate bubble?’
Although I have written about this topic in the past, I am surprised this continues to be the number one question I am asked. While there are some challenges ahead for buyers and sellers, I do not believe we are headed for another real estate bubble.
Most who ask this question are feeling the pressure of rising real estate prices in certain price ranges. There are more indicators to consider in evaluating the health of our local real estate market.
Realtor.com recently conducted an in depth market analysis of six housing trends that were fundamental to the bubble years. The first factor is real estate appreciation. When prices substantially outpace inflation, it does attract attention, but that factor alone is not proof of an unhealthy market.
In Reno-Sparks, we have had significant appreciation since 2012, but when you put rising prices in context with the market values we lost between 2008 to 2012, we are exactly where we should be with median price if we had experienced historical appreciation of 1 percent per quarter, or 4 percent per year. That is what the Residential Activity Report from UNR, Reno Center for Regional Studies indicates “normal” appreciation was from 1990 forward. Economic growth and household formation in our area, along with limited inventory are the underlying causes of rising prices. Those were not the causes in the “bubble” years.
The second factor to consider is how much house flipping is going on. Heightened flipping is a clear indication of speculation. To be considered a “flip,” a property would be purchased and resold within a very short period. With rising prices, we have seen a much lesser degree of flipping.
Many people have forgotten that loose credit was one of the main culprits of the housing crises. Anyone who has attempted to get a mortgage in the past eighteen months has discovered that while there is ample credit available for home purchases (many with down payments as low as 3 percent), no one would call it easy. Income levels, debt ratios and down payments are all carefully considered requirements, with much documentation needed to qualify.
Price-to-income and price-to-rent ratios are the next factors to consider. This is a trend that we watch carefully. We have not seen wages increase at the same pace as sales price and rental rates, but we are still not in the danger zone. However, we have had more than 100 new companies relocate here within the past four years, and with companies such as Tesla and Switch who have not yet started hiring in earnest, we will feel a similar “supply and demand” factor of available employees that should increase wages. Unemployment dropped in Washoe County in July to 5.5 percent; that is a large drop from the high.
Although the affordability index has decreased in our area recently, that makes sense when we realize for five years our property values dropped significantly, so as prices climb to a “healthy range,” that index should drop.
The final factor Realtor.com calls out is household formation to new home starts. They should be in line with slightly more than one household formed for every new home start. Brian Bonnenfant, project manager and an incredible data resource at the University of Nevada, Reno Center for Regional Studies, calculated this ratio in our area for this article. He reported new household formation in single-family product in 2015 at 1,318 in Washoe County. That is just shy of the 1,475 new single-family homes built that same year. The numbers and ratio are right in line with what is considered a healthy market.
Our key challenge is supply versus demand. The latest national poll shows demand is up 13 percent and supply down 5 percent.
In our community, it might be even more extreme. Affordable housing is another challenge we are facing. In 2016, 56 percent of our sales are single-family homes and condos priced under $300,000. While there appears to be the correct number of new home starts to begin to replace these sales, it is expensive to build in general, and even more expensive to build in areas where millennials want to live, primarily in urban areas. We need to support new projects that repurpose abandoned buildings and encourage high-rise, multi-family and other alternative projects in our urban core that can be built in the affordable housing price range.
Prices will continue to increase. Pulsemonics asked 100 economists, investment strategists and housing market analysts to weigh in on what they believe will happen with housing prices over the next four to five years. Their answer is that prices will appreciate 3.5 percent over the next five years. This will not happen in all price ranges in our market. For example, we have a four year supply of inventory priced at $1.5 million and above. We are beginning to see prices drop in the luxury market because of the large number of homes for sale in that price range. That market will not increase in price as quickly as the rest of the market.
The good news is that three recent surveys from Gallup, Bankrate Financial Security Index and the Joint Center for Housing Studies all showed that people believe owning their own home or other real estate was the number one investment they could make. The real estate market continues to remain strong, and I hope this commentary will assist you in your real estate decisions.
Nancy Fennell is president of Dickson Realty. This article originally appeared in Northern Nevada Business Weekly on Monday, September 5, 2016.