Home Markets Is There A Mini Bubble In Housing?

Is There A Mini Bubble In Housing?


To paraphrase the late comedian Groucho Marx, I would never want to live in a place that I could afford. Recently, the website Areavibes.com published a list of Americas most affordable cities. It read like a list where bad people are sent for punishment, the type of place where prisons are located. Here is the list.

  • Laredo, Texas                          6.) Lubbock, Texas
  • Buffalo, New York                 7.) Birmingham, Alabama
  • Detroit, Michigan                   8.) Des Moines, Iowa
  • Wayne, Indiana                 9.) Shreveport, Louisiana
  • Memphis, Tennessee         10.) San Antonio, Texas

With no insult intended to the fine citizens of these communities, these are pretty bleak choices. About the only name missing are the jungles of Nicaragua, but then that is a different part of America.

What this list tells us is that for the average family earning $53,046 a year to get a break on the cost of housing, they can choose to live where most people would not want to live even when they can afford it. Then there is the question of jobs, education etc. There is a reason why prices are at rock bottom levels.

Meanwhile, in the rest of the country, real estate has made a full-blown recovery from the 2008 financial crisis and that makes lots of people from bankers to investors very happy.

It was a long slow process but prices in many key cities are at all time highs and continue to rise. According to the latest Case-Shiller index, home price have been rising about 5.5% over the past 2½ years. That is the same rate as prescription drug prices! There seems to be no stopping real estate price inflation unless, of course, you live in Ft. Wayne.

There is a point to be made here and the point is that real estate prices in this country leave out most families. The fact is that home ownership in America at 63.7% is the lowest in over a decade.

How can this happen in an economy that fosters free market supply/ demand allocation of resources. How is it possible for fewer owners resulting in higher prices? It makes no sense, or does it?

Normally when you see prices rising, it is because demand has improved or because of a shortage of supply. For American families, demand hasn’t translated into ownership. The real estate industry sites a shortage of supply as the reason, but the figures on building permits and construction activity paint a picture of lots of building activity

It is no secret that much building has been aimed at the millennial demographic. In other words, tiny little 2 bedrooms of 600-900 square feet rental units that are priced in the stratosphere. The key takeaway here is the rental prices are measurable higher than the cost of ownership.

This has happened in the past but the current distortion relates to the free flow of capital. The financing comes from non-bank institutional sources including deep pocket foreigners looking for a safe place to stash their cash.

The Trump Administration spends much time on the topic of low-income people immigrating to America and taking away jobs. What about high-income capital flowing seamlessly into this country taking away affordable housing?

For foreign investors, Swiss banks are no longer safe now that the US Treasury Department cracked down several years back. Russian Oligarchs aren’t looking at investment returns; their primary interest is in hiding their stash. This means investment decisions are not being subjected to serious due diligence.

For example, there is a potential serious oversupply in rental housing in Americas largest cities. It began showing up last spring in New York and San Francisco. Huge operators like Sam Zell, one of the nations big residential real estate operators began feeling the impact. It is our guess Sam Zell is not alone.

The aging of the millennial demographic cannot be ignored. Family formations cannot be delayed and who can raise a family of three or four in 650 square feet. Thus the exodus is on. So, could all those investors in residential rental properties be left holding the bag? Hard to imagine a smart dude like Sam Zell is getting stumped, but strange things sometimes happen.

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