Are We Back in a Bubble: East Bay Real Estate Update for May 2013

ARE WE BACK IN A BUBBLE? Even knowing that prices are rapidly rising in the East Bay real estate, every week brings at least one astonishing closing. This week it was a home that closed 46% over list! It was not so long ago that a different boom was followed by the bursting of “the bubble.” Is this another bubble? I don’t think so and here is why:

• More stability: Most loans are now at fixed rates. You can’t get a sub-prime loan, and the old ones have been mostly purged from the system.

• More investment: Buyers now have higher down payments – most have at least 20% – and many have all cash. A boom is not a bubble unless it is empty.

• More truth: Both lenders and borrowers are required to disclose more. Buyers have a clearer idea of loan terms, and must undergo a more rigorous examination of their finances to qualify.

• Less inventory: Inventory in our area will increase as more owners are free to sell because they are no longer “under water.” But that is not likely to come in a surge. We’re already seeing a slow, steady increase in inventory each week, resulting in some subtle market changes.

• Less speculation: In the previous decade we saw properties “flipped” multiple times before they were even built.

• No more phantoms: Fear of back-logged foreclosures has dissolved. And new whispers about a mass sell-off by investors are improbable.

At some point buyers will have more choices, or rising interest rates will hold them back. But this will stabilize the market, not kill it. Not everyone agrees. Karl Smith writes in Forbes Magazine:

“Sometime in the near future it is very likely that credit standards for homebuyers will fall. This will allow homebuyers to make larger offers and it will allow young people to buy a home even when they lack a down payment. This rapid increase in the number of buyers and their purchasing power will likely drive home prices into a bubble.”

But my money is on Berkeley-based economist Ken Rosen and others presenting at the annual Fisher Center Real Estate Conference last month. Red Oak Realty CFO Kevin Hamilton attended in search of a deeper understanding of the underlying economics, particularly on the local level. Here is what he reported back to us Red Oak agents:

“The speakers outlined the many reasons why the Bay Area has experienced an expedited road to recovery and higher than average appreciation rates. We still maintain a disproportionate percentage of high paying jobs, in-demand technologies, and venture capital funding – all long-term boons to a stable and organic recovery.”

So what’s a buyer to do? Buy what you love, what you can afford, and what you anticipate holding for the long term. Get a fixed rate mortgage and save for a down payment to increase your buying power. Robert J. Shiller, Professor of Economics at Yale, seems to agree. In the concluding paragraph of his recent New York Times article:

“With rates now relatively low, this could be an auspicious time to buy a house with a fixed-rate mortgage. That could make good sense for people who aren’t out to bet on the housing or mortgage markets but are instead focused on settling into a home for the long term.”