Just when you thought things were cooling off, home prices surprised us with yet another killer year.
Tomorrow, Zillow will release the November edition within their Real Estate Market Reports, which will show home prices increased 6.5% in November from the year earlier, the best year-over-year gain since 2006.
Yes, you heard that right. It could be a seasonal blip, but still, best Calendar year since 2006-that\’s impressive.
I Was Wrong
I\’ll really do the first one to admit I used to be wrong about sustained, stellar home price appreciation. I truly thought things were overheating a few years ago, yet home prices continued to defy expectations.
I suppose we can thank low rates on mortgages and scant inventory for any. The good news is I\’ve learned something from all of this.
Whenever you think things are going to top out, they\’ve probably received a lot more time to keep going higher. This could be even more true when you watch things really closely.
The same happened in the stock market. It looked frothy one or two years ago, but now we\’re about the cusp of Dow 20,000. And perhaps Dow 21,000 if history is any indication.
Not long after, it might be time to worry, or least get slightly less bullish.
The takeaway is usually that market tops take a long time to get to, just like market bottoms, and you’ll doubt yourself along the route.
I\’ve been hearing chatter lately about how exactly we probably have another good 12 months, maybe less, depending on who you ask, in both real estate additionally, the stock market.
The sentiment seems to be that we can squeeze a little more from this rally, but it\’s clearly ending. Everyone seems to agree on that, not less than in private.
Does that mean the end is going to fall out once we all realize we\’ve gotten ahead of ourselves? That part I am not sure of, though history does tend to surprise us over and over again sticking with the same exact outcome (think about it).
We\’ll Never See Another Crisis Like We Did
The chart above (I annotated it) shows the Case-Shiller Home Price Index (red) versus the S&P 500 (blue) since 1987.
I discuss these matters with my wife sometimes, who always informs me I overthink everything. She\’s probably 100% right. But what struck me recently was her telling me something like, \”Things will never be as bad as they simply were a few years ago.\”
When I heard her point out that I thought to myself, \”famous last words.\” Your second you hear that kind of stuff, it invokes memories of the dot-com bust or perhaps the most recent housing crisis, and fears of impending doom.
Back at the begining of 1999, the Dow hit 10,000 to the first time-and it wasn\’t long before it hit 11,000. In actual fact, it was less than two months later that this climbed above that next key threshold.
Interestingly, it wasn\’t until 2006 that this Dow surpassed 12,000 the very first time. Does that mean the Dow will hit 20,000 soon, then 21,000 soon after, then tank? Or at least stall for five years? Maybe, who knows?
There\’s certainly a lot of uncertainty in the world at the moment. To be able to talk about geopolitical tension, you\’ll have a good amount of material to fuel days, otherwise weeks of conversation.
Should You purchase a House in 2017?
Now let\’s talk about properties. Home prices are no longer on sale. Whether they\’re still cheap is in all likelihood a more complicated question.
Most pundits will confirm that Americans are saving money on housing historically, that is mainly because of near-record low mortgage rates.
Still, home prices have increased as home loan rates have risen, so there is no clear correlation there, plenty of might expect.
But there will come an occasion when wages won\’t be able to keep up with home prices, at which point they\’ll need to fall, or at least, gains will need to moderate as incomes get up to date.
The question is when will that basically happen? When the dot-com bubble burst throughout the turn of the century, home prices pulled back around 10% in the San fran.
Before that somewhat modest decline, home prices had risen about 60% from 1997 to 2000.
In Bay area, the median home value increased from $670,000 next year (most recent bottom) to $1.12 million as of early 2016, a gain exceeding 67%.
History is beginning to sound pretty familiar, don\’t you think it\’s?
Of course, home prices in the S . fransisco bounced back between 2003 and 2006, before tanking again. Regardless, the trajectory is invariably up.
The question then is clearly reliant on timing. As I\’ve said before, time heals all real estate investment wounds, but there are better and worse times to obtain. There are also those who tell you not to time the stock market, and probably the housing market too.
For me, 2017 doesn\’t appear to be a particularly good year to shop for real estate. There\’s just too much uncertainty in the world at the moment, and with home prices at new, fairly pricey all-time highs, I\’d rather watch how things engage in.
Pull Back More Likely Than Another Crisis?
Fortunately, the mortgages originated in the past few years (and still today) are of the utmost quality. CoreLogic launched a new quarterly report this week featuring its Housing Credit Index (HCI), which claims mortgage credit risk has become low.
In fact, it fell during the third quarter of 2016 coming from a quarter earlier and a year before that. You are able to thank rising credit scores, falling DTI ratios, and reduce LTVs for that.
But it might be set to switch direction as mortgage rates begin to rise, finally. Chances are borrowers are going to assume more risk to deal with the higher rates and home prices available, perhaps in the form of ARMs and smaller downpayments.
Before long, we could be back in a very familiar situation, though as my cousin said, not as bad the way it was before.
If you wait, maybe you will notice a pullback of 10% or so, it is just unclear when that\’s going to happen, plus where mortgage rates will be at that time. And with rents expensive too, it isn\’t an ideal situation for anyone to merely sit around and wait. But at some time, something\’s got to give.