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I’ve been saying it feels like 2004 all over again, and that it feels like we’re reigniting the housing bubble.  While that’s just been my gut feel based on past experience in the previous bubble, I just found this article on “Political Calculations” blog that asks, analyzes and answers the question “Is the housing bubble back?”

To determine a housing bubble from normal home price appreciation they compare prices to incomes.  When home prices deviate from income, they look deeper to see if there is something causing a temporary blip, or if there is a sustained trend from the norm.  I can’t do the analysis justice here, so head on over to Political Calculations for the full article.  It is a very worthwhile read.

They conclude that yes, we are in a bubble that began in the middle of 2012 or about the time when it became abundantly clear here in San Francisco that comps had little meaning.

So if we’re in a bubble, the next questions are 1) how long can it continue, and 2) how much higher can real estate prices go which should help you decide 3) should you buy, sell or wait.  And the article ends with their own question “why?” and promises to answer it on their next installment.  I think that answer is easy.  Interest rates are so low that buyers can afford loans that are 1/3 larger than what they could afford in 2008 when prices came crashing down.   That leaves a lot of price appreciation room, and quite a lot of time too.  We should be able to identify a peak when affordability matches the last peak… that would require some combination of higher interest rates, and higher prices.  Since the Fed has stated they plan to keep rates down for another 1 to 2 or 3 years, we just might catch up entirely with price appreciation.

Unfortunately if we are in a bubble, it will end.  And it will presumably end when the Fed is forced to raise interest rates, which they plan to do only when the economy is better.  Quite the catch 22 don’t you think?  A house price boom that ends with a better economy, but when the bubble bursts it hurts the economy.

So what should you do?  Consider your long term goals, and keep your eye on affordability of the market at large.

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My firm Pacific Union posted their February Bay Area and Tahoe “Monthly Real Estate Update”. These are the excerpts for San Francisco (click on the headings for the charts:

SAN FRANCISCO, CONDOS

San Francisco’s condominium market remained red-hot in February, with sales closing just 34 days after being listed — down from 62 days in December and 70 days in February 2012.
The median sales price rose to $824,750, the highest in more than a year, and sellers received an average of 3.6 percent above the asking price.
Available homes on the market slipped to an extremely tight 1.7-months’ supply, down from a 3.4 months’ supply one year ago.

SAN FRANCISCO, SINGLE-FAMILY HOMES

The median sales price for single-family homes in San Francisco shot up 26 percent to $801,000 in February, an increase of $166,000 from a year earlier.
And sellers had another reason to be thankful: Final prices were, on average, nearly 6 percent above asking prices.
Homes closed an average of 31 days after being listed, the fewest days on market in more than a year after four straight months of declines. The housing supply was measured at 1.8 months’ supply, the highest level since last September, but still evidence of a tight market.

As an aside, I just ran a recent sale report for a new buyer client looking for condos in Noe Valley, Corona Heights and Ashbury Heights and the average over-asking for their segment of the market is 10% with one condo selling for 24% over asking, and another for 35% over asking.  So keep in mind, the PacUnion report is all of San Francisco and some segments are far hotter than others.

If you’re starting a San Francisco home search start here: www.SF-MLS-Search.com

If you’re curious what your San Francisco home is worth enter your data at www.Evaluate-My-Home.com and you’ll get a prompt reply.

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John Burns of John Burns Real Estate Consulting says in the below video interview on Bloomberg TV that house prices could appreciate 40% in 2 years if interest rates stay where they are.

Read more including a few charts to illustrate his thoughts here.  And here’s the video interview:

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All but one thing is in place in San Francisco for the housing market to keep booming, and that is easier lending standards.  We have extremely limited inventory, high rents, record affordability (thanks to those high rents and record low interest rates), and those factors have led to an incredibly robust San Francisco housing market in 2012 and early 2013.   Should loan criteria ease, look out, we could be in for another amazing year or four in home price appreciation.

This weekend one lender told me about a 80/10/10 loan (10% down, 10% second) which she claimed only one bank in the entire country is doing.  It only takes one to get the ball rolling.  There are government sponsored options as well with Fannie Mae Homepath Loan which allows 10% down on loan amounts up to $625,500, and FHA up to $729,750.  But for the market to really take off it will require the participation of private sector banks, with easier qualifying criteria, and higher loan limits, not just less cash for down payments.

Well, sure enough, several articles like this one are citing a Moody’s Analytics report (which is behind a pay wall) that loan criteria is likely to ease in 2013.  Two excerpts from the article:

The housing recovery that began in 2012 regardless of constraints placed by a tight mortgage lending environment “promises improvements this year as the drivers of tough credit standards reverse,” according to Celia Chen of Moody’s Analytics, who authored the report.

and

Lack of accessibility to credit has weighed on housing demand and as a result hampered market rebound, but in 2013, the weight began to lift and will continue to do so as improving consumer credit quality and household balance sheets widen the pool of borrowers.

There are several factors that will improve over time.  First, those with bad credit due to foreclosures and short sales and other financial problems suffered during the recession will slowly improve adding more potential home buyers.  Second, as home prices rise there will be fewer and fewer delinquencies, and more and more formerly under-water owners above water.  Third, lenders will be profiting all the way out, and as they see the likelihood of future loans to stay good, they will expand. Fourth, as lending increases, so does the economy and jobs, leading to even more potential buyers.

Will we ever get back to the bubble lending standards?  I doubt it.  But we hardly need that to have a sustained housing recovery and more price appreciation than we’ve already had.  

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