Do Three Strikes Make A Bubble?

A couple of articles this week over at NuWire.com question the ability of the housing market to continue price improvement in the short term. Three constraints on further improvement are in play right now:

1. Rising prices reducing housing affordability for consumers.
2. Interest rates are spiking.
3. Household incomes are showing signs of stress.

Both articles make it clear that investor buying has been the driving force behind price appreciation over the past year or so. Investors are still involved, even competing for shrinking inventory in some markets. Much of the mainstream media is not addressing the price improvement accurately, under-valuing the contribution of investors.

When home prices rise without a corresponding improvement in household incomes, housing affordability is reduced and consumer buying suffers. The media is concentrating on reporting “price improvement” without focusing enough on the fact that investors have been the major impetus in these price increases. There is very little buying activity from the customary and historical market influencers, regular buyers and first time home buyers.

We must also examine the fact that healthy real estate markets in the past have been more balanced between existing and new home purchases. There has been very little participation in rising prices represented by new homes, as very few new homes are being built. Concentrating solely on home prices ignores these multiple influencers, and creates a skewed view of the situation.

“Bubble” prognosticators can also be focused on incomplete data sets, thus creating the fear of a bubble and coming burst. If the idea that a bubble-burst market is all about sudden cessation of price increases and a subsequent drop, then we’re probably looking at one in the making. However, it’s really not relevant to our outlook as investors. Sure, there may be fewer homes available at bargain basement prices, but there are also fewer people able to buy a home, thus more renters.

Every time we read about a setback for people who would like to buy a home, we’re reading about an opportunity for real estate investors. Sure, this opportunity changes and moves around between amazing and just reasonable, but it is still opportunity.