The U.S. housing market has been booming in the last year or so. Nationwide, home prices are up about 9% in the past 12 months, homebuilders like PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL) and D.R. Horton (NYSE:DHI) have trounced the market and foreclosure filings in Q1 are the lowest since 2007.
But could we be in the middle of another bubble, or destined for a dreaded double-dip in the housing market?
Here are some troubling signs to take into account:
Still-Weak Economy: This one is obvious: If you don’t have a job or have a job that pays less than you made a few years ago, you’re not in the market to buy real estate. The persistently high unemployment rate and anemic growth means it’s unrealistic to get back to pre-recession levels simply because we aren’t back to a pre-recession labor market. And if you really want to be pessimistic, remember that the current round of government spending cuts — $85 billion worth — has not fully hit home. Unpaid days off for federal workers and shrinking budgets for contract employees are on the way later this year.
Speculators Abound: Hot markets like Las Vegas and San Francisco continue to see a rapid rise in all-cash transactions — a clear indicator that these buyers are investors, not homeowners. Also, a recent Gallup poll said the two best long-term investments to make are gold and real estate, with the two assets essentially in a dead heat. Not encouraging, considering how the gold bubble has popped and sent shockwaves through Wall Street. Being the most fashionable investment is never a good sign — as Apple (NASDAQ:AAPL) traders can attest.
Rates Will Rise: It’s a great time to buy a house or refinance, since a qualified borrower can easily get an annual interest rate in the 3% to 4% range. But the Fed can’t keep ZIRP in place forever, and eventually mortgage rates will rise — and add hundreds of dollars to mortgage payments for many prospective homebuyers. The cheap houses have already been bought, and once the cheap rates are gone, too … well, many people will be priced out of the real estate market.
This is not to say another crash is coming, per se. Lenders remain much more cautious after the pain of the subprime mortgage crisis, so we don’t have the toxic environment of the late 2000s to deal with. It’s also worth noting that many metro markets like Washington, D.C., or New York City probably won’t ever crater completely, simply by virtue of a lack of supply and strong baseline demand.
But there are hints that the real estate recovery is not as rosy as it seems.
Remember, thinking that housing prices will only go up from here is how we got in this mess to begin with.
- Of course, for the time being it’s clearly a seller’s market in real estate. (The Slant)
- Mark Hanson writes that California housing isn’t in recovery, but actually “bouncing along the bottom” still. (The Big Picture)
- Are we seeing a double-top in real estate stocks, as measured by one key ETF? (Slope of Hope)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.