The US housing market has been in recovery for going on 2 years now, and the recovery was started and has been largely driven by bargain hunters buying good properties at low prices. As the buying spree rolled on prices rose, and as inventories became constrained prices rose faster. So, prices rose, but is it too late to make money on a US housing investment?
No Bubble Here
Firstly, to address the almost ludicrous fears about a bubble. Prices rise when a bubble is forming, but a bubble doesn't form whenever prices rise, as it is put in the Alice in Wonderland book: you might just as well say I breathe when I sleep is the same as I sleep when I breathe - since the crash we can (again from the book) say to some commentators "it is the same for you"!. Since the American bubble burst and the shockwave burst many more bubbles and almost crippled the financial world, whenever prices rise at above 20 percent per year the B word comes out, regardless of any consideration of supply and demand.
A bubble forms when one of the metrics of supply and demand goes crazy, for example supply is at a healthy normal-market level and stays there or rises at a steady pace, and prices are at a normal market level, while demand rises at an exceptionally fast rate. This is what happened in the recent US crash, because it became so easy to get a 100 percent mortgage.
In America right now, soaring demand has caused prices to rise quickly, but this demand is because of rock bottom prices. And yes supply has fallen, but as prices rise and more people gain sufficient equity to sell and move, supply is set to rise at a healthy rate, and as prices rise, the bargain hunters will be turned off and bring demand down. Thus all the signals point to the two heading for a balanced meeting place, not a cataclysmic collision. Prices have risen but still aren't at pre-crash levels in most places, and in any case it usually takes a stressor to make a bubble burst, in the case of America it was a waterfall of defaulting sub-prime loans hitting the banking system, elsewhere it was the American crash. Right now the American economy is in good shape and the banking system is still restrictive sufficiently to make it safe, so again - no bubble here.
The Current Dynamic
As was mentioned above, US house prices were driven up by rising demand as people began to snap up the glut of rock-bottom-priced properties at an incredible rate. But as most of these properties were either distressed or bank-owned, the price rises were not completely funnelled into the mainstream market. Following months of rising sales, shrinking inventories also began to put upward pressure on prices.
By this measure it probably is too late to make a killing on US housing. In fact, a recent research study by the FED recently found as much. However, both of these two conclusions leave out one very vital thing; the US rental market.
The FED study looked at whether US housing was still a good investment if the property was not lived in. It found that people typically live in their homes for an average of 13 years, this period, which is longer than the typical investment made homes purchased to live-in a better investment than those purchased purely for investment because housing investments were found to fair better when held for longer periods.
“We compute that 40 percent of homes owned for less than 13 years have negative average annual returns, compared to 12 percent of homes owned for 13 years or more. Interestingly, while a much greater portion of those owning for 13 or more years obtain positive returns, the average annual return was actually slightly higher for those owning fewer than 13 years (0.95 percent versus 1.03 percent),” they found.
However, the FED study did not factor renting properties into the equation at all. This made the finding of the study in direct conflict with the findings contained in the study. It found that holding property for longer periods brought the best chance of profit, making home-buying better, but didn’t cover the money that could be made by those who buy, hold and don't live in the property.
As was also mentioned above, the US mortgage market is still heavily restricted leaving thousands of potential first time buyers unable to get a mortgage - either because of their credit rating or inability to raise a deposit - and stuck renting. On top of that there is a general feeling that the current generation is shifting more towards renting as a lifestyle choice, because of the globalised job market, and the subsequent flexibility of living in rented accommodation. Right now American landlords are making strong yields on rental property.
On top of that there are still plenty of areas in the vast American market not only where prices are still very low but where the recovery hasn’t even gotten off the ground and/or is just about to. Thus the possibilities exist not only for higher rental yields, but also capital appreciation. So, is US housing a good investment - in a word yes.
- Wednesday 19 June 2013