Housing recovery not yet a bubble, experts say

By Brian Bean & Tim Hardin

Home prices in the Inland Empire are increasing 2 percent a month, similar to levels seen in 2005. But some experts and local economists say the gains are not a bubble – at least not yet.

Online real estate site Trulia says homes nationwide are 7 percent undervalued, based on its newly launched Bubble Watch report.

“Home prices fell so much after the last bubble burst that they still remain below normal levels even as prices rise sharply today,” Trulia Chief Economist Jed Kolko said in a release. “Several forces are waiting in the wings that should slow down today’s rapid price gains before they rise into bubble territory again. More inventory, higher mortgage rates, and fading investor activity would each take home-price gains down a notch.”

The recent real estate recover is more indicative of a rebound than a bubble, some economists say. Prices reached a peak of 39 percent overvalue in 2006 before crashing to 15 percent below value in 2011, according to Trulia.

Home prices in the Inland Empire have increased 25 percent to 30 percent over the past year, fueled by historically low inventory, rock-bottom interest rates and an army of cash-toting investor buyers backed by Wall Street hedge funds.

TWO YEARS LEFT

Two local housing experts said we can expect at least another two years of price appreciation.

Christopher Thornberg of Beacon Economics and Bruce Norris of The Norris Group appeared May 10 at the Second Annual Market Forecast & Agent Rally in Ontario. Both were bullish on the real estate market and said Inland Empire homes are still undervalued because supply is very low and demand is very high.

“The only time you’re going to see inventory explode is if the economy falls through again,” Thornberg said. “And we’re a long way from that.”

Norris, a long-time investor and market guru, said nearly 85,000 people who suffered foreclosure in 2008-2010 are ready to buy again in 2013, and decreasing unemployment (now at 9.4 percent in California) will draw people back to California.

“California is going to tighten up the (jobless) gap,” Norris said. “When that happens, we’ll get migration. People would rather hammer nails in the sun than in the snow.”

Thornberg, considered to be one of California’s leading economists, said the local market could comfortably handle about another 30 percent appreciation but was likely to exceed that. Like all real estate markets, increases are always followed by declines.

“We’ve never seen an (inclining) market that didn’t turn into a bubble,” he said.

Trulia’s experts agreed with that sentiment. Four California regions already have breached the overvaluation line: Orange County, Los Angeles, San Jose and San Francisco.

“Although we’re far from bubble territory today, there’ll be another home-price bubble someday, somewhere,” Kolko said in a release. “The history of American real estate is full of speculation, bubbles, and busts. Even now, most people expect home prices to get back to the peak of the previous bubble again in the next 10 years. Prices may be far from bubble levels today, but we need to stay on guard for signs of the next bubble.”

LESSONS OF THE PAST

Painful lessons of the past are still fresh in the minds of many. Buyers today are in a frenzy to get an offer accepted, fearing they soon will be priced out of the market. Similar fears in 2004-2006 combined with the goldstrike mentality prompted home buyers to overextend themselves and take on risky financing. Ultimately, many suffered foreclosure when the housing market crashed and left them without the ability to refinance out of those bad loans.

With history ready to repeat itself, here are some tips to keep from making the same mistakes of the past:

DEBT IS DANGEROUS: Don’t overleverage. Yes, values are increasing, but wheel will stop turning at some point. Those who borrowed too much money face losing their home if they have any kind of a hiccup in their income.

And avoid home equity lines of credit. They are recourse loans in California and cannot be wiped out in a foreclosure.

DON’T BUY INTO THE SCAMS: Don’t get sucked into radio ads and late-night TV claims that you can make millions as an investor. Most Americans are unsuited to be real estate investors – as a business. They make snap judgments based on romantic notions about a steady supply of rental income.

Successful real estate investors work night and day and learned hard lessons through years of experience. They have strong reserves to handle vacancies and repairs. And they have realistic expectations about the challenges, the rewards and the time required.

HAVE A PLAN: Know what's happening in your neighborhood. Do your homework. And hire a Homeowner Advocate to guide and educate you about the market. Waiting until it's time to buy or sell to do your homework is too late. The market forces that may benefit or sink your chances are in force months before they become apparent.

Want to know how much equity you have in your home today? Call us at 951-778-7900 to set up a 10-minute consultatioan.

Brian Bean and Tim Hardin, owners of Dream Big Real Estate in Riverside, can be reached at 951-778-9700, PE@DreamBigRealEstate.com or at www.DreamBigRealEstate.com.