sponsored post by Lauren Hruby and Scott DeVouton
The Kansas City existing homes market is hot, with numbers causing some to ask whether we’re in another real estate bubble. After enduring the bust of the Great Recession, it’s natural that people could be wary of today’s boom. However, while prices may even out soon, it’s hard to say we’re looking at a bubble that’s about to burst.
What’s a Bubble?
A bubble is not considered a flattering description of any market. It essentially means that the value of an asset is built on questionable grounds. Because of its shaky foundation, it’s destined to fall apart. In the Recession bubble, unqualified buyers were allowed to purchase beyond their means. This shaky lending foundation eventually caught up with itself, causing home values to crash.
What’s Not a Bubble?
It’s important to understand that supply and demand lead to a normal market ebb and flow. If fewer people list their homes and more people are looking to buy, prices will increase. If more people list and fewer people buy, prices will decrease. Every increase is not a bubble, and every decrease is not a crash. The question in every hot market is whether the foundation is solid, or whether it’s made from thin air.
Home Prices are Up
As of March, the median home value in the Kansas City area was up almost $20,000 from 2014, to $150,000. Average days-on-market has dropped to 69 days, a very low number. Closed sales are up over 16% from 2014, and are at their highest level in years. All these factors show a market that’s hot, but do they indicate that we’re in a bubble?
Bubble Conditions vs. Regular Supply and Demand
A real estate bubble is marked by high activity, sure. By that measure alone, it might be easy to say we’re in a bubble right now. However, thankfully, we need to look at a few other factors. As in most markets, real estate prices are controlled by supply (sellers) and demand (buyers). While prices and volume get the headlines, supply and demand can paint a more complete picture of the situation.
Demand is High
Demand is high right now. Interest rates have been at historic lows, the jobs market is good, and more and more Millennials become homeowners each year. However, lending requirements have been fairly strict the last few years, limiting buyers who truly cannot afford to purchase a home.
Contrast today’s demand to that of, say, the pre-Recession bubble. Buyers in that market were far more likely to receive financing on shaky grounds. Everyone has heard of that era’s “NINJA” loans that buyers could obtain despite having “no income,” “no job,” and “no assets.” There were a lot of buyers, but there were also a lot of buyers who got in over their heads. Today’s buyers are more qualified, and appear to be buying within their means. This is huge. The risk that lined the past market (the “air” to the bubble, if you will), is simply not as great.
Supply is Low
Today’s housing supply is also much different than in the pre-Recession market. During that bubble, everyone wanted to list their home or investment property. Prices were increasing at a rapid pace, and anyone, it seemed, could qualify for financing. Investors and regular homeowners all jumped into the game. That supply stream was just the fuel the bubble needed to stay afloat.
Today’s supply is quite the opposite. Ask any real estate agent and they will tell you how hard it is to find a good home, much less the perfect home at the right price. Inventory is at a 10-year low right now, despite high demand. Supply, inventory divided by rate of sales, is at just 2.3 months for existing homes. This is a very low number, indicating a strong seller’s market.
It’s this part of today’s market – supply – that really sets it apart from a classic bubble. Simple economics says that if supply is down and demand is up, prices will go up. Right now, we’re seeing supply and demand play out this way in the Kansas City area. Prices are up, but it’s not because everyone wants to cash in on easy equity. It’s not a feeding frenzy held aloft by a high-risk buyer pool.
Today’s market, while hotter than we’ve seen in years, appears to be an appropriate reaction to regular market forces. Prices are higher because there are fewer and fewer homes on the market and a steady stream of buyers. Buyers are also better qualified than many were in the NINJA loan days, lowering market risk and minimizing the “air” that would normally fill a real estate bubble.
What now?
Most experts feel that home prices will level off at some point. Interest rates are sure to go up, making it harder for people to borrow, thus affecting market demand. More homeowners, many of whom are still under water or just want to enjoy a moment of having equity again, will decide to list, thus affecting supply. Lower demand and higher inventory would cause home prices to level off and decrease, if at all, in moderate amounts.
In Kansas City, it’s important to highlight that we’re a more rational market that other parts of the country. When you read about a “bubble,” places like San Francisco and New York City are regularly noted for their insane housing costs. Here in the Midwest, price increases, while notable, are nowhere near the level they are in other places. While home values here will level off, it probably won’t be painful or drastic.
As we head into the traditionally busy part of the season, the talk among realtors is less about any perceived bubble than it is about inventory. Rather than worrying about whether things will sharply bust, the focus is on how many homeowners will decide to list. The demand is most definitely there. If inventory increases and interest rates stay relatively low, prices should level out, or at least increase less. The question in Kansas City appears to be whether it will be a strong seller’s market the rest of 2016, whether it will be a more moderate seller’s market, or whether the market will become more balanced as the year moves along.
Author’s Note – If you enjoy reading our Midtown KC Post articles, and might be buying or selling your own home, please contact us. We enjoy writing these, and love helping people.
Lauren Hruby Real Estate
Not mentioned above is the MAJORITY of home sales today are non-mom and pop investors paying CASH up front for the properties. I live in a nice neighborhood that is trendy and I have three around me that this has been the case as they sold last year. Homes that are becoming rentals…THAT is the new trend; the millennial can’t afford to buy homes today at current prices. Homes prices have traditionally been 3 years annual salary. Do the math. At the average pay, and national salary of the average family being at $35-50,000, then homes should be 90-$150,,000. We are in a huge bubble. I predicted the housing bubble of 2008 back in 2005 for one reason. I saw the average joe’s salary not even beginning to reflect the increases in yearly salary. Houses have to be affordable for the masses, and they no longer are. This is why there is a huge influx of millennials renting and multi family housing is the new trend. This article is like an economist saying they don’t see a recession coming….they never do. Asking a realtor this question, would one expect any different answer?
Get ready for the following big housing bubble to pop. When people start having to pay excess of selling price for any home, it’s not lengthy until so many people cost from the market, home owners can’t keep using the increasing price of owning their very own home, and mortgages go below water and foreclosures skyrocket, lenders start refusing loans, and demand dries up. Then wait for a next recession hitting in reaction.