More than half of homes in the US are selling above list price. People are playing a lottery to see if they’ll win the honor of spending hundreds of thousands of dollars to build a home.
There’s a growing sense of unease. Renters at the lower end of the market have seen their rents rise in some places even as they’re more likely to be suffering the economic harms of the last year. Would-be homeowners are furious as they lose bidding war after bidding war, looking for someone to blame as they watch their peers land a home and lock in a low mortgage rate. And homeowners are riding high for now, exhaling sighs of relief that they made it into the exclusive club and eagerly watching their wealth skyrocket, worried about what might happen to change that.
That’s the current state of America’s housing market, but it could also describe the US housing bubble that inflated from 2004 through early 2007, before prices crashed on the economy and the global financial system.
Most economists and investors aren’t focused on the housing market right now. Their attention is on other factors dogging the economy, such as a labor shortage, decades-high inflation, supply chain disruptions and of course the ongoing pandemic, which has been at least partly the cause of all those problems.
The previous record for rising home prices was a 14.4% year-over-year gain in the fall of 2005, according to Case-Shiller. The US housing market blew past that mark in April of this year, with a new record set every month since. Year-over-year price increases now stand at 19.9%.
The reason for this likely is that the most recent time the housing market attracted such universal attention, lots of people decided it was a bubble. But there’s no agreed-upon economic definition for an asset bubble. And in everyday conversation, it appears to mean prices have gone up a lot and I think they’re going to come crashing down again.
In a way, it doesn’t really matter what we call it. There are fundamental problems in the housing market that must be fixed and the solutions for them are relatively straightforward. Whether prices will come down, stop appreciating, or this is a new normal in the price of homes depends on public policy choices that are in our control.
With the recovery underway in the California real estate market and elsewhere in the U.S, it is interesting and timely to look at returns generated in residential real estate and compare this to returns generated in the equity markets. At this point, many of my clients are inclined to invest in real estate, feeling that the time is right to purchase an investment home and that returns going forward will be superior to what they could achieve elsewhere. The question is: is this assumption correct? To shed some light on the comparable returns, I have assembled data showing year-over-year returns and long-term average returns for both residential real estate and equities markets.
The map below shows strong real estate appreciation last year as the housing market continued to recover from its steep decline. As we know, California had strong appreciation last year. The average rate of appreciation in California came in at 6.77% annually over the 39-year time frame. I think many people might be surprised that the long-term average appreciation is this low given some of the anecdotal cases we hear about a home purchased for $40,000 in 1975 being worth over $500,000 by the time the house is sold by the next generation.
Many real estate investors will be quick to point out that an investment home brings in annual rental income. This is true
The bottom line is that real estate investing in California seems to be pretty much a wash compared to investing in a broadly diversified stock portfolio. It is not clear that one is superior to the other and investors need to carefully consider their need for liquidity, their willingness and ability to invest time in the maintenance of the property, their risk tolerance for daily stock market valuation, along with many other factors before deciding on the best course of action for themselves.
Are you thinking about moving to the Golden State or hitting the road? Are you already living in cities in California? Have you ever invested before or is this the first time for you to think about investing? None of the above matters. The only thing that is important for the experts in Amin Vali real estate investment group is to be up to date on every market dimension and help you to not Invest on bubbles nor for temporary profit. The best goal is to invest for continual and ongoing profit. In this path you are not alone. Invest with Amin Vali, Invest with Confidence.
B.S in Civil Engineering,MBA, Realtor
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Realtor in Zutila Inc.