House prices are up 8% in California and 7.1%, on average, across the country. In affluent neighborhoods, the increases are even higher – anywhere from 10% to 15% or more since last year. This has prompted some analysts to warn of a potential “bubble” in the housing market. A recent article on CNBC stated that housing prices in Seattle have increased 13% over the past year, and that a strong economy and limited supply of available properties have driven prices higher. It also noted that interest rates (which would affect mortgage payment), a potential trade war (which could affect employment), and city and local ordinances (which may impact location desirability), could negatively impact prices and pop the current bubble.
But I tend to disagree. I think these increases have more of a run left in them, despite the challenges of higher interest rates on mortgages and the lack of significant income increases in recent years. Follow the money. Investment firms from Toronto to Los Angeles are using a combination of debt financing and private investment (much of it from wealthy Chinese) to fund massive numbers of single family residence acquisitions, who then manage the purchases as rental properties. These firms, and individual investors, are betting that many Americans would rather rent than buy. If this is where the smart money is headed, shouldn’t you head there too?
Experience is a great teacher. During the last real estate bubble in the early 2000s, house prices in my neighborhood were increasing on the order of 25% per year for at least four years before the peak. This tells me that we are not even close to a bubble yet. Even with prices increasing at 10% or 15% year over year, I am not yet concerned. In general, what is driving the current spike in prices is more related to supply and demand, particularly the supply side of things. Also, consider that even with mortgage rates approaching 4.6%, we are at the lover end of historical rates. The point being, prices are not yet out of reach – if you are in the market for real estate the time is now! Don’t hesitate, or at some point in the future that opportunity may pass you by.