I came across an excellent article this week on housing titled "Your House Is An Undiversified Bond Investment." The author reviews many of the concepts that I have discussed here over the past few years; specifically the importance of interest rates on the future value of real estate. For a review please see:
2013 Outlook Part 7: Home Prices Have Not Bottomed
You do not need a calculator to understand that a monthly morgage payment of $1,000 is very different than a monthly payment of $2,000. There is no rational analysis that exists showing how rising interest rates can be positive for housing. The following shows the long term fall in 30 year mortgage rates which may have finally reached their epic low (coinciding with the recent rise in the 10 year treasury bond):
While interest rates are important, there are many factors that play into the fundamental analysis of future price direction. On the other side of the ledger you have the income needed to pay the mortgage. You can track the health of this metric by following the median income in the United States. As you can see in the chart below, real wages have plunged and tracked sideways. This does not bode well for the income support needed to make higher mortgage payments.
Residential real estate has seen a major force come into the market over the past year that has provided a major boost upward in prices. Large investment funds have entered major markets with large swaths of cash to purchase homes to rent out. How do we know that these cash buyers have been the major driver of home prices? The following chart shows mortgage applications (real working family buyers), which have plunged and flat lined.
Since home prices experienced their first dramatic dive back in 2007, we had the tax credit buying in 2010 that created a brief blip upward in pricing (and sent everyone into euphoria). When that passed prices resumed their downtrend. Most recently we have seen the investment buyers enter the market, shown below, creating the next push higher (and the next round of real estate euphoria).
This enormous new demand has been countered with banks holding millions of home off the market, creating the ultimate 1-2 punch of both artificial demand and supply. We can look to Las Vegas for a perfect example of this phenomenon because it is a city that has experienced a recent (unexpected) price surge. I highly recommend reading the following article in full from a local real estate agent in Las Vegas, but I will provide just a taste of it below.
From the Las Vegas Review Journal: "Anyone Else Hear The Housing Bubble Inflating?" by Steve Hawks